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

By Kristina Cooke

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: Quote, Profile, Research, Stock Buzz) 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 , its biggest drop in a month. The S&P financial sub-index is now 30 percent below its record high set a year ago.