US STOCKS-Stagflation fears send stocks sharply lower
(Updates to close, changes byline)
* Fed warns of higher inflation, slower growth
* Oil extends rise 3.3 percent as inventories fall
* Airline stocks fall sharply on oil rise, Boeing comments
NEW YORK, May 21 (Reuters) - U.S. stocks tumbled on Wednesday, posting their biggest losses in two weeks, amid fears the U.S. economy faces 1980s-style stagflation after the Federal Reserve slashed its economic growth forecasts while raising estimates for inflation.
Further fueling market concerns, oil prices surged further into uncharted territory, soaring over $4 a gallon, or 3.25 percent, to a record high close at $133.17, after U.S. government report showed a surprise drop in crude stockpiles.
Boeing's (BA.N) chief executive added to oil-related jitters after he said oil prices are crimping airlines' growth. The aircraft maker's shares were the top drag on the Dow Jones industrials and an index of airline stocks .XAL shed 11.95 percent.
The Fed's warning on Wednesday led to a 2.6 percent fall in the S&P financials sub-index .GSPF, its biggest drop in a month. The S&P financial sub-index is now 30 percent below its record high set a year ago.
In addition to its forecast on the economy, the Fed released the minutes from its last policy meeting, which signaled the central bank was unlikely to cut U.S. interest rates any time soon.
"The clear terminology about growth and inflation in the Fed's comments is like a bucket of cold water," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.
"The last period we had a sustained period of stagflation, the only way we got out of it was through aggressive rate hikes that shocked the system. The fact rates will have to go up is what people are worried about," he added.
The Dow Jones industrial average .DJI fell 227.49 points, or 1.77 percent, to close at 12,601.19, while the Standard & Poor's 500 Index .SPX dropped 22.66 points, or 1.60 percent, to 1,390.74. The Nasdaq Composite Index .IXIC lost 43.99 points, or 1.77 percent, to 2,448.27.
Boeing's chief executive's remarks followed AMR Corp's (AMR.N) American Airlines saying it would slash domestic capacity in the face of soaring fuel prices.
Among major U.S. airlines, shares of Continental Airlines (CAL.N) dropped 13.15 percent to $14.20 after a brokerage downgraded the U.S. airline sector. AMR shares fell more than 24.15 percent to $6.22 on the NYSE.
Shares of Moody's Corp (MCO.N) slid 15.92 percent to $36.91 after it launched an investigation into a report that it had wrongly assigned triple-A ratings to complex European debt products.
Trading was light on the New York Stock Exchange, with about 1.36 billion shares changing hands, below last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.16 billion shares traded, also below last year's daily average of 2.17 billion.
Declining stocks outnumbered advancing ones by a ratio of about 2 to 1 on the NYSE and Nasdaq. (Editing by Gary Crosse)
