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Rate worries push stocks down
Some good news: Inflation lower than expected

NEW YORK -- Stocks extended a dismal week on Wall Street Friday, falling sharply as investors became increasingly certain that the Federal Reserve will raise interest rates to slow down the robust U.S. economy.

While fears of a rate increase have shaken stocks for weeks, rumors that the Fed would boost rates higher or sooner than previously thought sent the market sliding in afternoon trading.The Dow Jones industrial average fell 130.76 to close at 10,490.51. The blue-chip index lost 309.33 points, or 2.9 percent, for the week.

Broader stock indicators also fell. The Standard & Poor's 500 slipped 1.18 to 1,301.64, and the Nasdaq composite index fell 36.74 to 2,447.88.

The fear of higher interest rates has become so pervasive on Wall Street that traders Friday looked past one strong indication that inflation has not returned to the U.S. economy.

In an eagerly anticipated report, the government said the Producer Price Index rose only 0.2 percent last month. The index, which measures inflation before it reaches the consumer, was expected to offer an indication of whether the Fed will raise interest rates at its next policy-making meeting, scheduled for June 29 and 30.

But Friday afternoon, a pair of rumors swept through the uneasy stock and bond markets. Word spread that the Fed had convened a special, early meeting to debate a rate increase. Some traders also cited a rumor that Tiger Management LLC, a hedge fund, was about to fail and was seeking help from the Fed.

A Fed spokesman declined to comment, but traders said both rumors were quickly refuted. Nonetheless, the damage was done. The yield on the 30-year Treasury bond soared to 6.16, its highest level since November 1997, pulling any willing buyers away from stocks.

"We're at such a tenuous level in the marketplace that rumors were all it took," said Arthur Hogan, chief market analyst at Jefferies & Co.

Coupled with the rumors, the fragile state of the morning rally led investors to focus on two less favorable barometers of the current interest rate climate.

The Commerce Department reported that retail sales -- which represent about a third of the nation's economic output -- rose 1 percent in May, extending a long string of gains.

In addition, the University of Michigan's consumer sentiment index rose to better-than-expected levels, showing that Americans remain upbeat thanks to the strong U.S. economy.

The signs of economic strength helped convince some market watchers that the Fed may raise rates more than the quarter-percentage point that most anticipate, perhaps over the course of several months.

"The Fed could conceivably take back all three of its rate cuts from last year," said David M. Jones, chief economist at Aubrey G. Lanston & Co. in New York. "People began to speculate about multiple rate hikes, and that was too much for the stock market to take."

Internet shares were mostly lower. CMGI tumbled 11 3/4 to 89 3/4 after the Internet holding company announced higher-than-expected third-quarter losses. EBay, the online auctioneer, plunged 16 11/16 to 166 after its system crashed, forcing it to halt operations.

Dow components were lower across the board, with Hewlett-Packard, down 4 5/8 to 88 3/8, posting the sharpest decline.

Declining issues outnumbered advancers by a 4-to-3 margin on the New York Stock Exchange, where volume totaled 687.71 million shares, compared to 700.51 million in the previous session. The NYSE composite index fell 3.35 to 619.50, and the American Stock Exchange composite index fell 2.43 to 765.82. The Russell 2000 index of smaller companies fell 4.26 to 438.01.

Overseas, Japan's Nikkei stock average rose 0.56 percent. European markets were higher, as Germany's DAX index rose 1.8 percent, Britain's FT-SE 100 gained 1.3 percent, and France's CAC-40 closed 0.1 percent higher.