Wall St indexes fall as inflation worries weigh

Traders work on the floor of the New York Stock Exchange, December 12, 2007.

NEW YORK (Reuters) - Stocks swooned on Friday on concerns that surging inflation may prevent the Federal Reserve from lowering interest rates enough to pull the economy out of the grip of a housing and credit crisis.

The three major indexes tumbled more than 1 percent each, and posted their worst week since November 11, after a report showing a jump in the consumer price index in November. Combined with a sharp rise in producer prices, the reading highlighted concerns voiced by the Fed earlier in the week when it lowered rates modestly.

With inflation making further rate cuts look less likely, retailers, banks and industrial stocks were sold off. Retailer Wal-Mart Stores Inc (WMT.N) fell 1.5 percent and credit card company American Express Co (AXP.N) slid 2.9 percent.

"The main driver was nervousness. You've got some people using the stagflation word, and you hear that and it messes up the psyche of the average investor," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

The Dow Jones industrial average .DJI was down 178.11 points, or 1.32 percent, at 13,339.85. The Standard & Poor's 500 Index .SPX was down 20.46 points, or 1.37 percent, at 1,467.95. The Nasdaq Composite Index .IXIC was down 32.75 points, or 1.23 percent, at 2,635.74.

For the week, the Dow was down 2.1 percent, the S&P was down 2.5 percent and the Nasdaq was down 2.6 percent. It was the worst weekly percentage drop for the indexes since November 11.

The inflation data followed a decision by the Fed on Tuesday to lower interest rates modestly, and a move by the world's central banks to make it easier for stressed banks to borrow.

But investors saw both responses as inadequate and speculation has grown in the markets about what the Fed might do next.

Higher interest rates make it more expensive for consumers and businesses to borrow money. Shares of Wal-Mart were down 1.5 percent at $47.63, while shares of American Express were down 2.9 percent at $52.29.

Energy company shares edged lower following a 1 percent decline in crude oil prices. Shares of Exxon Mobil Corp (XOM.N) declined 1.7 percent to $91.18 as crude oil prices CLc1 in New York fell 98 cents to settle at $91.27 a barrel.

Morgan Stanley cut ON Semiconductor (ONNN.O) and the stock fell 3.5 percent to $8.24 on Nasdaq. Shares of Intel Corp. (INTC.O) were down 3.2 percent at $26.29.

3M Co (MMM.N) shares were down 1.1 percent at $85.93.

Black & Decker shares BDK.N were down after the maker of power tools and hardware said that weaker-than-expected business conditions would hurt results for the current quarter. Black & Decker slid 8.5 percent to $73.31.

Citigroup Inc. (C.N) said it plans to consolidate $49 billion of assets tied to troubled structured investment vehicles onto its balance sheet and Moody's Investors Service cut its debt ratings.

Shares of the largest U.S. bank rebounded briefly after Goldman Sachs lifted its rating on Citigroup's debt, citing the chief executive's measures to raise capital levels in the first quarter of 2008. The shares ended down 1 percent at $30.70.

Trading was below average on the New York Stock Exchange, with about 1.31 billion shares changing hands, below last year's estimated daily average of 1.84 billion, while on Nasdaq, about 1.94 billion shares traded, below last year's daily average of 2.02 billion.

Declining stocks were outnumbering rising ones by a ratio of about 4 to 1 on the NYSE and by 3 to 1 on Nasdaq.

(Reporting by Caroline Valetkevitch; editing by Gary Crosse)