Stocks fell Tuesday as a poor reading of economic activity in the Midwest overshadowed better-than-expected consumer confidence data.

The Dow Jones industrial average (search) dropped 75.07 points, or 0.71 percent, to finish at 10,467.48. The Standard & Poor's 500 Index (search) dropped 7.28 points, or 0.61 percent, to 1,191.50. The technology-laced Nasdaq Composite Index (search) dropped 7.51 points, or 0.36 percent, to 2,068.22.

For the month of May, the Nasdaq jumped 7.6 percent -- its largest monthly gain since October 2003. The Dow finished May up 2.7 percent and the S&P 500 advanced 3 percent.

"We're in a difficult scenario, where the economic information is clearly indicating that the soft patch is going to prevail for an extended period of time," said Ned Riley, chief executive officer of Riley Asset Management, of Boston.

The Purchasing Management Association of Chicago (search) reported that its index of business activity in that area fell to 54.1 in May on from 65.6 in April. In April, the index had fallen from 69.2 in March.

Any reading in the indicator above 50 indicates expansion in the manufacturing sector, while and a number below 50 indicates contraction. The Chicago indicator is a closely watched barometer of manufacturing activity and is considered a precursor of the national assessment to be issued by the Institute of Supply Management (search) on Wednesday.

The news canceled out the positive effect on trading from the Conference Board's (search) consumer confidence index. The index rose to 102.2, up from a revised 97.5 in April, above the 96 analysts expected.

Shares of Dow industrial companies that are benchmarks of the U.S. economy fell, with Honeywell International Inc. (HON), an aerospace and industrial conglomerate, down nearly 1 percent at $36.30, and Caterpillar Inc. (CAT), a heavy equipment maker, down 0.5 percent at $93.80.

Although Wall Street has rallied in recent weeks, it has also reacted nervously to economic indicators, unable to shake concerns that the recovery is faltering just as the
Federal Reserveholds to its policy of raising interest rates. This week's indicators, which also include the government's employment report for May, due out Friday, are reviving some of the market's uneasiness.

"We've seen a good run in the market, and now it's pausing a little bit," said Scott Jacobson, chief investment strategist at Jefferies & Co. "The debate now is how far the Fed will go. Will the Fed drive the economy into a slow patch?"

Troubled insurer American International Group Inc. (AIG), which said it had overstated net income for the past five years by $3.9 billion, or 10 percent, and aluminum producer Alcoa Inc. weighed on the blue-chip Dow average. AIG, which regulators have accused of improper accounting, dropped 1.5 percent, or 85 cents, to $55.55.

Aluminum producer Alcoa Inc. (AA) fell 1.4 percent, or 37 cents, to $27.10 after it received a subpoena from a U.S. grand jury looking into possible antitrust violations in the aluminum fluoride industry.

Mechel Steel Group OAO (MHS), a major Russian mining and metals producer, rose 29 cents to $26.69 after announcing that its board recommended a dividend for 2004 that is worth about $1.47 per U.S.-listed share.

Google Inc. (GOOG) rose $11.27 or 4.2 percent to $277.27 after an analyst from Piper Jaffray raised the firm's price target on the stock. Dow component Alcoa Inc. fell 37 cents to $27.10 after reporting after the bell Friday that it had received a grand jury subpoena related to an investigation of the aluminum fluoride sector.

Computer maker International Business Machines Corp. (IBM) was off 2 percent, or $1.55, at $75.55. United Technologies Corp. (UTX), an industrial and aerospace conglomerate, was down 1.1 percent, or $1.18, at $106.70.

Shares of Dreamworks Animation SKG Inc. (DWA) fell 9.1 percent after the company's latest movie, "Madagascar," missed analysts' expectations for ticket sales in its opening over the Memorial Day weekend. Dreamworks closed down $2.95 at $29.40 on the New York Stock Exchange. It was the biggest percentage loser on the NYSE.

Among gainers, shares of Northwest Airlines Corp. (NWAC) rose 8.9 percent, or 50 cents, to $6.09 on Nasdaq after a Merrill Lynch analyst raised the rating on the company's stock to "buy" from "neutral."

The dollar continued to rally against the euro, hitting its highest level in almost eight months after France rejected the European Union constitution over the weekend. The euro dropped as low as $1.2312 before recovering to $1.2338 Tuesday afternoon.

The higher dollar as well as the weaker outlook on manufacturing helped push the 10-year Treasury bond higher, pushing its yield briefly below the psychological barrier of 4.00 percent for the first time since early February.

Trading was active, with 1.48 billion shares changing hands on the New York Stock Exchange, just below the 1.46 billion daily average for last year. About 1.77 billion shares traded on Nasdaq, below last year's 1.81 billion daily average.

The number of shares that rose slightly exceeded the number that fell, with 1,683 stocks advancing and 1,653 declining on the NYSE. On Nasdaq, decliners outnumbered advancers by a ratio of about 8 to 7.

The Russell 2000 index fell 0.19 or 0.03 percent to 616.71.

Overseas, Japan's Nikkei stock average rose 0.1 percent. Britain's FTSE 100 was down 0.5 percent, Germany's DAX index fell 0.4 percent, and France's CAC-40 was down 0.3 percent.

Reuters and the Associated Press contributed to this report.