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US stocks fell sharply for a second day on Wednesday after data showing higher-than-expected labour costs stoked worries about inflation and interest rates. Energy stocks such as Exxon Mobil Corp fell and the sector was among the heaviest drags on the S&P 500 after government data showed gasoline stockpiles rose more than analysts had forecast.
Rate-sensitive sectors such as utilities and banks also pulled the major indexes lower after an interest-rate hike by the European Central Bank underscored the trend of rising rates.
The two-day sell-off in stocks comes just days after the S&P 500 had completed its best two months in nearly four years, leading investors to question whether this could be the start of a long-anticipated pullback.
"People are a little skittish," said Chip Hanlon, president of Delta Global Advisors, Inc in Huntington Beach, California. "The notion that the Fed is not cutting rates, and long- term interest rates going up, is going to send the market down in the short-term - we've come a long way and it's a good reason for a pullback."
The Dow Jones industrial average slid 129.79 points, or 0.95 percent, to end at 13,465.67.The Dow is now down 226.33 points from its lifetime high of 13,692.00 set during the session on June 1. The Standard & Poor's 500 Index tumbled 13.57 points, or 0.89 percent, to 1,517.38, posting its biggest two-day drop since March.
The Nasdaq Composite Index skidded 24.05 points, or 0.92 percent, to 2,587.18. A government report showed US worker productivity grew more slowly than first estimated in the first quarter, driving up labour costs and reinforcing concerns about inflation. Unit labour costs rose a higher-than-expected 1.8 percent.
On the New York Stock Exchange, the drop was broad-based, with decliners outnumbering advancers by a ratio of more than 4 to 1. On Nasdaq the ratio was 2 to 1.
The small-cap Russell 2000 index was down 0.83 percent. The small-company index was lagging major indexes on a year-to-date basis after a long time in the No 1 spot as investors turned to large-capitalisation stocks. Large caps can benefit from their exposure to global markets, which can mean a steadier flow of profits as US economic growth moderates.
"Small caps are toast," said Jack Ablin, chief investment strategist at Harris Private Bank in Chicago. "They're expensive, and the earnings expectations are irrational." Home-building stocks fell after a leading trade association predicted the pace of US home sales and prices will fall further in 2007 than originally expected.
The National Association of Realtors trimmed its sales forecast for the fourth straight month and expanded the speed at which sales prices would drop. The Dow Jones US Home Construction Index slid 2.3 percent. IBM was the biggest drag on both the Dow and the S&P 500, falling 3.2 percent to $102.41, retreating after an 8.7 percent run higher in the past three months.
Whole Foods Market Inc's stock fell a day after antitrust authorities said they would file a lawsuit to block the organic grocer's take-over of rival Wild Oats Markets Inc Whole Foods stock fell 3 percent to $39.25, weighing on the Nasdaq.
Shares of investment bank Goldman Sachs lost 0.9 percent to $227.35, while the stock of rival J.P. Morgan Chase & Co slid 1.3 percent to $50.56.
Exxon Mobil's shares fell 0.8 percent to $83.62. Trading was moderate on the NYSE, with about 1.55 billion shares changing hands, below last year's estimated daily average of 1.84 billion. On the Nasdaq, about 2.14 billion shares traded, above last year's daily average of 2.02 billion.

Copyright Reuters, 2007

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