Stocks Plunge on Inflation Worries; Dow Sheds More Than 200 Points

Stocks plummeted on Wednesday as a government report showing higher-than-expected inflation fanned rate-hike worries on Wall Street. At one point in afternoon trading the Dow was down nearly 250 points, though it slightly trimmed losses ahead of the close.

The Dow's drop was its largest one-day loss in three years, while the Nasdaq posted a loss for the seventh consecutive session and erased its gains for the year.

The Dow Jones industrial average slid 214.28 points, or 1.88 percent, to end at 11,205.61. The Standard & Poor's 500 Index fell 21.76 points, or 1.68 percent, to finish at 1,270.32. The Nasdaq Composite Index tumbled 33.33 points, or 1.50 percent, to close at 2,195.80.

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The Nasdaq is now down 0.4 percent for the year. The Dow is still up 4.6 percent, while the S&P 500 is up 1.8 percent this year.

The declines came as the Labor Department's Consumer Price Index, a measure of inflation, increased 0.6 percent. Even the core index, which excludes more volatile price data such as energy costs, showed a 0.3 percent increase, which was higher than anticipated.

Investors sold shares in banks, industrial conglomerates and other rate-sensitive stocks. An index of bank stocks slid 1.8 percent, while shares of blue-chip Citigroup Inc. (C) dropped 1.4 percent, or 71 cents, to $48.83. JPMorgan Chase & Co. (JPM), another blue chip, lost 2.4 percent, or $1.07, to $43.25 in NYSE trading.

"Inflation, which is the principal focus of the Fed, is higher than Chairman Bernanke will feel comfortable with," said Hugh Johnson, chief investment officer at Johnson Illington Advisors. "It adds to the belief the Fed may raise rates further, and that is a problem for both the bond market and the stock market."

The sharp sell-off in stocks was part of a broader market rout, with U.S. Treasuries also tumbling amid signs of accelerating inflation. The benchmark 10-year U.S. Treasury note fell 13/32 to a price of 99-24/32. Its yield, which moves in the opposite direction of its price, jumped to 5.16 percent late in the session from 5.11 percent late Tuesday.

"Stocks that are getting hit the hardest are those that have been the darlings of the Street," said Christopher Zook, chairman and chief investment officer at CAZ Investments in Houston, Texas. He listed industrial companies, raw materials and energy shares.

The New York Stock Exchange imposed limits on index-arbitrage sell orders on the Standard & Poor's 500 index after the New York Stock Exchange Composite Index fell more than 160 points. The index fell 2.24 percent, its biggest daily drop in three years, to close at 8,199.38.

Industrial conglomerates, including 3M Co. (MMM) and Caterpillar Inc. (CAT) , were among the Dow's biggest decliners. Both stocks were down about 2 percent, with 3M falling $1.88 to $84.42 and Caterpillar dropping $1.43 to $75.91.

Wall Street got the inflation chills before the market's opening bell, when the Labor Department said the Consumer Price Index rose 0.6 percent in April, above economists' forecast for a rise of 0.5 percent. Core CPI, which excludes food and energy costs, advanced 0.3 percent, also faster than forecast.

Federal Reserve Chairman Ben Bernanke and other monetary policy-makers said last week the Fed might have to continue to raise rates to control inflation.

Shares of Boeing Co. (BA) , the biggest drag on the Dow, fell 3 percent, or $2.63, to $83.77. Boeing, a big U.S. defense contractor and jet manufacturer, Wednesday kept its profit and revenue forecasts unchanged for this year and the next.

Of the 30 stocks in the Dow average, the only gainer was Hewlett-Packard Co. (HPQ), the No. 2 computer maker, which rose after it reported higher quarterly profit late Tuesday.

Hewlett-Packard shares gained 3.4 percent, or $1.05, to $32.16.

Trading was heavy on the NYSE, with about 2.09 billion shares changing hands, above last year's daily average of 1.61 billion, while on Nasdaq, about 2.40 billion shares traded, above last year's daily average of 1.80 billion.

Declining stocks outnumbered advancing ones by a ratio of about 14 to 3 on the NYSE and by about 11 to 4 on Nasdaq.

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The Associated Press and Reuters contributed to this report.