U.S. stocks fell Tuesday, taking the Dow below 11,000 for the first time in three months, as investors grappled with the prospect of more interest-rate increases and slowing economic growth.

Late in the session, stocks trimmed most of the session's losses and the Dow managed to close just a whisker above the psychologically important 11,000 mark.

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The Dow Jones industrial average was down 46.58 points, or 0.42 percent, to end at 11,002.14. The Standard & Poor's 500 Index was down 1.44 points, or 0.11 percent, to finish at 1,263.85. The Nasdaq Composite Index was down 6.84 points, or 0.32 percent, to close at 2,162.78.

For the year, the Nasdaq is down about 2 percent. In contrast, the Dow is still up about 2.7 percent and the S&P 500 is up about 1.3 percent so far this year.

A day after Federal Reserve Chairman Ben Bernanke's tough talk on inflation, more Fed officials offered further warnings about growing price pressure, cementing expectations of further rate hikes.

Shares sensitive to higher interest rates, including JP Morgan Chase & Co. and Bank of America Corp. (BAC), were among the S&P 500's heaviest decliners.

Industrial stocks such as airplane maker Boeing Co. (BA), whose profits are closely tied to the economy's health, helped lead the Dow's decline.

Stock investors are nervous about inflation, including higher commodity prices, because it raises companies' costs.

"Bernanke ... really shook things up, and we're in the second day of the effect here," said Larry Peruzzi, senior equity trader at The Boston Co. Asset Management in Boston. "There continue to be inflationary concerns."

In Tuesday's session, the major U.S. stock indexes fell below key technicals levels — a move analysts say portends more downside pressure in the days ahead.

GETTING SQUEAMISH ABOUT INFLATION

William Poole, president of the Federal Reserve Bank of St. Louis, said in a Wall Street Journal interview published Tuesday that if inflation expectations keep rising, slower growth alone may not be enough to reduce actual inflation.

Fed Governor Susan Bies, talking to a bankers' group, said inflation, excluding food and energy, has been running in the high 2 percent range for three quarters, "which personally makes me very uncomfortable."

On Monday, Bernanke said the Fed will be vigilant on inflation even if economic growth starts to slow. The comments triggered a sell-off in stocks, and the Dow ended down almost 200 points and the Nasdaq plummeted more than 2 percent.

In the banking sector, JPMorgan shares slumped 1.4 percent, or 59 cents, to $42.38 on the New York Stock Exchange. Bank of America Corp.'s stock was down 0.4 percent, or 21 cents, at $48.53.

Industrial stocks tumbled, with Boeing down 1.8 percent, or $1.48, at $80.65, and United Technologies Corp. down 2.3 percent, or $1.40, at $60.05.

General Motors Corp. (GM) cited inflation when it warned shareholders that meeting the automaker's cost-savings target would be very difficult. GM shares fell 3.1 percent, or 80 cents, to $25.25 on the NYSE.

HEADACHES FOR HOME BUILDERS

A brokerage downgrade of the home building and building products sectors added to weakness.

Wachovia cut home builder and building products shares to "market weight" from "overweight" and lowered its ratings on D.R. Horton Inc. , KB Home , Lennar Corp. Inc. and Pulte Homes Inc. D.R. Horton declined 5.6 percent, or $1.40, to $23.41 and KB Home slid 6.7 percent, or $3.28, to $45.82. Shares of Lennar fell 3.2 percent, or $1.50, to $45 while Pulte shares dropped nearly 5.5 percent, or $1.64, to $28.11.

DOLLAR'S GAINS HURT TECH SHARES

In New York foreign-exchange trading, the dollar was up against a basket of major trading-partner currencies, with the U.S. Dollar Index up 0.64 percent at 84.79 from a previous session close of 84.25.

That added to weakness in shares of tech companies, which tend to be heavy exporters. Shares of Microsoft Corp. (MSFT) fell 1.6 percent, or 37 cents, to $22.13, and was the biggest drag on both the Nasdaq and the S&P 500.

"Their products get a little bit more expensive" with the rising dollar, Peruzzi said.

While the Dow fell below the psychologically important 11,000 level, the S&P 500 slid under its 200-day moving average, a long-term trend line that measures a security's or a stock index's resilience.

One technical analyst said the next key level to watch on the Nasdaq is 2,025, and noted that breaking that level would take the index lower. The Dow's next support base is 10,750, he said.

Trading was heavy on the NYSE, with about 1.89 billion shares changing hands, above last year's daily average of 1.61 billion, while on Nasdaq, about 2.13 billion shares traded, above last year's daily average of 1.80 billion.

Declining stocks outnumbered advancing ones by a ratio of about 2 to 1 on the NYSE and by 3 to 2 on Nasdaq.

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