Stocks fell Tuesday after the Federal Reserve cautioned that pressures from inflation had picked up in recent months, rekindling investors' fears of more aggressive rate hikes ahead.

Wall Street, however, took some reassurance from the Fed's retaining its commitment to gradual increases in the cost of borrowing.

The Dow Jones industrial average (search) lost 94.88 points, or 0.90 percent, to end at 10,470.51. The Standard & Poor's 500 Index (search) fell 12.07 points, or 1.02 percent, to close at 1,171.71. The Nasdaq Composite Index (search) was down 18.17 points, or 0.91 percent, to finish at 1,989.34.

The Dow slid below 10,500 for the first time since Feb. 1 and the tech-heavy Nasdaq touched a fresh intraday low for 2005.

"The Fed conceded that there's a bit more inflation in the near term than people were expecting to hear about," said Jack Caffrey, equities strategist at J.P. Morgan Private Bank. "And if you get short-term inflation, there's the danger of it extending into the long term, and that means higher interest rates and lower multiples for equities."

The Federal Reserve (search) raised U.S. interest rates a quarter percentage point Tuesday for a seventh straight time. The unanimous and widely anticipated decision moves the benchmark federal funds rate — which affects credit costs throughout the economy — to 2.75 percent.

The Fed's policy panel said it expected to keep raising short-term borrowing costs at a "measured" pace, wording believed to imply modest quarter-point increases. The statement also suggested some concern on the inflation front.

"Though longer-term inflation expectations remain well-contained, pressures on inflation have picked up in recent months and pricing power is more evident," the Fed said.

"I think the tone definitely changed — this was a much more hawkish statement on inflation than I think pretty much anyone was expecting," said John Caldwell, chief investment strategist at McDonald Financial Group, part of KeyCorp

"The Fed upgraded their assessment of how the economy is doing, with output being 'solid,' but also upgraded their inflation outlook."

He added that "the market is reading that the Fed has some work to do to cool off some of these inflationary pressures and that opens the door to possibly more aggressive rate hikes, which the market apparently does not want."

The yield on the 10-year Treasury note shot up to 4.63 percent, the highest reading since July. Meanwhile, the dollar surged against the euro and the yen.

Among interest-rate sensitive sectors moving lower were banks and mortgage lenders. Citigroup (C) fell almost 3 percent, or $1.32, to $44.44, while J.P. Morgan Chase & Co. (JPM) slid 2 percent, or 73 cents, to $35.06. The Philadelphia KBW Bank Index fell 1.76 percent.

The rate worries overshadowed the positive benefit of a 2.5 percent drop in crude oil prices. Crude for May delivery settled at $56.03 a barrel, down $1.43 on the New York Mercantile Exchange (search).

A key inflation measure, the Labor Department's (search) Producer Price Index, gave Wall Street a little solace prior to the Fed meeting. Wholesale prices climbed 0.4 percent, largely due to high energy prices. With volatile food and energy prices removed, "core" PPI rose just 0.1 percent, in line with economists expectations.

General Motors Corp. (GM) again struggled with bad news about its finances. The Financial Times reported the automaker has backed out of an agreement that allowed earlier payments to its suppliers. GM lost 15 cents to $29.54.

Alcoa Inc. (AA), a Dow component, said it will eliminate 2,000 jobs over the next year to streamline its operations, and expects to record one-time restructuring charges. The company also will sell its 46.5 percent stake in Norwegian metals and energy group Elkem ASA for about $870 million. Alcoa fell 50 cents to $30.96.

Retek Inc. (RETK) agreed to be acquired by Oracle Corp. (ORCL) for $11.25 a share, ending a bidding war between Oracle and its software industry rival, SAP AG of Germany. Oracle announced late Monday it had reached a definitive agreement with Retek, a Minneapolis-based maker of software for retailers. The deal is valued at about $669 million. Oracle is expected to report third-quarter earnings after the bell Tuesday. Analysts expect the company to report earnings of 15 cents a share for the period.

Altria Group Inc. (MO), parent of cigarette maker Philip Morris USA, rose nearly 2 percent to $64.38. On Tuesday, the Wall Street Journal reported the U.S. Justice Department secretly met with the largest U.S. cigarette makers in an effort to settle the government's civil fraud and racketeering case.

Home builder Lennar Corp. (LEN) announced a 39 percent jump in profits for the quarter, beating Wall Street's earnings forecasts by 16 cents per share. The company also raised its full-year earnings forecasts to $7.15 per share, up from $6.90 per share. Lennar gained 73 cents to $55.60.

Cereal and yogurt producer General Mills Inc. (GIS) lost $2.10 to $49.42 after accounting changes and the sale of European holdings pushed the company to a quarterly loss. The company still managed to beat analysts' forecast by 4 cents per share.

American International Group Inc. (AIG) slumped $1.70 to $56.20 after the company fired its chief financial officer and another executive, saying the two were refusing to cooperate with government investigators. State and federal regulators are looking into the insurer's business practices.

Video game maker Electronic Arts Inc. (ERTS), the world's largest video game maker, fell 16.9 percent, or $11.20, to $55.15 a day after it warned of weaker-than-expected earnings.

Overall, trading was active, with 1.68 billion shares changing hands on the New York Stock Exchange, above the 1.46 billion daily average for last year. About 1.86 billion shares were traded on Nasdaq, above the 1.81 billion daily average last year. Decliners outnumbered advancers on the New York Stock Exchange by about 3 to 1 and by 3 to 2 on Nasdaq.

The Russell 2000 index of smaller companies was down 2.99, or 0.48 percent, at 618.58.

Overseas, Japan's Nikkei stock average fell 0.32 percent. In Europe, Britain's FTSE 100 was up 0.08 percent, France's CAC-40 rose 0.35 percent for the session, and Germany's DAX index rose 0.57 percent.

Reuters and the Associated Press contributed to this report.