Stocks fell after economic data showed the pace of inflation accelerated in April, boosting speculation that the Fed will raise rates longer than Wall Street had expected.

"Inflation, which is the principal focus of the Fed, is higher than Chairman Bernanke will feel comfortable with," said Hugh Johnson, chief investment officer at Johnson Illington Advisors. "It adds to the belief the Fed may raise rates further, and that is a problem for both the bond market and the stock market."

The Dow Jones industrial average slid 214.28 points, or 1.88 percent, to end at 11,205.61. The Standard & Poor's 500 Index fell 21.76 points, or 1.68 percent, to finish at 1,270.32. The Nasdaq Composite Index tumbled 33.33 points, or 1.50 percent, to close at 2,195.80.

The Nasdaq is now down 0.4 percent for the year.

The Dow has lost more than 500 points this week, paring its advance for 2006 to 4.6 percent. The S&P 500 is up 1.8 percent this year.

NYSE TRADING COLLARS IN EFFECT

The sharp sell-off in stocks was part of a broader market rout, with U.S. Treasuries also tumbling amid signs of accelerating inflation. At 4:30 p.m., the benchmark 10-year U.S. Treasury note was down 12/32 at a price of 99-25/32, while its yield was up 4 basis points at 5.15 percent.

"Stocks that are getting hit the hardest are those that have been the darlings of the Street," said Christopher Zook, chairman and chief investment officer at CAZ Investments in Houston, Texas. He listed industrial companies, raw materials and energy shares.

The New York Stock Exchange imposed limits on index-arbitrage sell orders on the Standard & Poor's 500 index after the New York Stock Exchange Composite Index fell more than 160 points. The index fell 2.24 percent, its biggest daily drop in three years, to close at 8,199.38.

Citigroup shares fell 1.4 percent, or 71 cents, to $48.83 and JPMorgan Chase & Co., another blue chip, lost 2.4 percent, or $1.07, to $43.25 in NYSE trading.

Industrial conglomerates, including 3M Co. and Caterpillar Inc., were among the Dow's biggest decliners. Both stocks were down about 2 percent, with 3M falling $1.88 to $84.42 and Caterpillar dropping $1.43 to $75.91.

THE COLD BREATH OF CPI

Wall Street got the inflation chills before the market's opening bell, when the Labor Department said the
Consumer Price Index rose 0.6 percent in April, above economists' forecast for a rise of 0.5 percent. Core CPI, which excludes food and energy costs, advanced 0.3 percent, also faster than forecast.

Federal Reserve Chairman Ben Bernanke and other monetary policy-makers said last week the Fed might have to continue to raise rates to control inflation.

Shares of Boeing Co., the biggest drag on the Dow, fell 3 percent, or $2.63, to $83.77. Boeing, a big U.S. defense contractor and jet manufacturer, on Wednesday kept its profit and revenue forecasts unchanged for this year and the next.

HP RISES, BUT APPLIED MATERIALS FALLS

Of the 30 stocks in the Dow average, the only gainer was Hewlett-Packard Co., the No. 2 computer maker, which rose after it reported higher quarterly profit late on Tuesday.

Hewlett-Packard shares gained 3.4 percent, or $1.05, to $32.16.

On the Nasdaq, communication stocks and semiconductors were the top decliners. Qualcomm Inc. fell 2.7 percent, or $1.29, to $46.90 and Applied Materials Inc. slid 5.2 percent, or 92 cents, to $16.93.

Trading was heavy on the NYSE, with about 2.09 billion shares changing hands, above last year's daily average of 1.61 billion, while on Nasdaq, about 2.43 billion shares traded, above last year's daily average of 1.80 billion.

Declining stocks outnumbered advancing ones by a ratio of about 14 to 3 on the NYSE and by about 11 to 4 on Nasdaq.

Economists had been forecasting the CPI would rise by 0.5 per cent. The core inflation rate, which excludes volatile food and energy prices, jumped 0.3 per cent.

That boosted the year-over-year core inflation rate from 2.1 per cent in March to 2.3 per cent in April - its the highest annual rate in 13 months.

"More importantly, this does suggest that rising energy costs and possibly emerging capacity constraints may be causing inflationary pressures to suddenly start bubbling up from beneath the surface," said TD Bank economist Beata Caranci in a morning commentary.

The growing possibility of a further hike in U.S. interest rates helped to drive U.S. stocks lower on Wednesday. The Dow Jones industrial average was down 115 points to 11305 at 11:05 a.m. EDT.

The Federal Reserve has been on a steady, two-year-long campaign to raise interest rates. It has hiked its key lending rate 16 consecutive times, most recently to 5 per cent, and warned last week that further rate hikes were possible, depending on the economic data.

Canada's inflation report for April is released Thursday.

The Dow Jones Industrial Average had its worst one-day points drop since March 2003, tumbling 214 to 11205.61, or 1.9 per cent, while Europe's main bourses all suffered falls of about 3 per cent.

In London, the FTSE 100 registered its biggest one-day reversal in more than three years, leaving traders discussing whether the three-year equity bull market was now formally over. The UK's leading equity barometer has lost 400 points, or 6.5 per cent, in a week.

It was the publication of fresh inflation data in the US that triggered the latest wave of selling in New York. The US consumer price index rose 0.6 per cent last month, boosted by high energy prices. But it was a 0.3 per cent acceleration of the closely watched core rate, which excludes volatile energy costs, for the second month in a row that spooked the markets and reinforced expectations that rises in global interest rates would now accelerate.

Financial markets' expectations about higher inflation were a challenge to central bankers' credibility, economists said, pointing to a jump in US Treasury yields as both stocks and commodity prices went into broad retreat.

"This is not welcome news to the US Federal Reserve or the financial markets," said Stuart Hoffman, chief economist for PNC Financial Services Group. "We believe the Fed would prefer to take no action at their June meeting but this is precisely the type of inflation data that argues against such a pause."

The dollar rallied as investors hastily retreated to the relative safety of the US, unwinding risky trades involving emerging market currencies.

Alan Ruskin, chief international strategist at RBS Greenwich Capital said: "The numbers will add to volatility across all asset classes."

Meanwhile, in Europe inflation data for the 12-country eurozone showed the core rate, also excluding energy costs, jumped in April to an annualised rate of 1.6 per cent. The acceleration is likely to stoke European Central Bank fears about inflation dangers.

The ECB is expected to raise its main interest rate in June from 2.5 per cent, possibly by half a percentage point.

It became clear on Wednesday that the Bank of England's interest rate-setting body had a three-way split at its meeting this month, pointing to mounting concerns about inflationary pressures and increasing the chances that the UK would also raise borrowing costs this year.

Michael Dicks, economist at Lehman Brothers, said central bankers were "talking the same language" about inflation risks.

"It is almost as if they are looking at each others spread-sheets, and looking at the world in the same way," he added.

- Half of Americans have changed their vacation plans to stay closer to home, according to an Associated Press/Ipsos poll this month.

- Prices beyond the gas pump are also edging up. The "core" consumer price index (CPI), which excludes volatile food and energy costs, surprised analysts by jumping 0.3 percent last month, according to a government report Wednesday.

These pocketbook pressures don't signal a return of "stagflation" - the harsh blend of recession and rapid inflation that surfaced three decades ago.

But they do represent an economic climate less friendly to consumers - a gray zone where the pace of economic growth may be slowing even as the threat of inflation remains in the foreground.

"It's finally caught up" to average Americans, says economist Michael Cosgrove, who publishes The Econoclast newsletter in Dallas. "The cost of credit has gotten to a level where it's starting to impact people's decisions negatively."

This represents a reversal from just a few years ago, when gas was cheap, the interest on a fixed-rate mortgage was below 6 percent, and home prices hadn't yet soared to today's peaks.

The new head winds also include a weakening dollar, which eats away at Americans' spending power for imported goods or foreign travel.

In short, prices have gone up for several key items: credit, foreign currency, housing, and the fossil fuels that are a basic cost for virtually every home and business.

All this explains why indexes of consumer confidence have sagged in recent weeks, despite signs of healthy economic growth and a strong labor market.

It's a confusing period even for Federal Reserve policymakers, now weighing whether additional interest-rate hikes are needed to stamp out inflation, or whether the pinch on consumers is already starting to slow the economy to a sustainable pace of growth.

"Clearly we are seeing a slowdown in housing," and autos sales are weak, says Ed Yardeni, chief economist at Oak Associates in Akron, Ohio. Yet "it takes a while for interest rates to get to levels that really bite." Indeed, many forecasters see the economy growing at a still-solid 3 percent pace in the second half of the year, as exports and business investment help make up for possibly weaker consumer spending.

Against this backdrop of uncertainty, the Fed may decide to hold off before hiking interest rates further, to see how consumers fare in the months ahead.

But Wednesday's inflation report prompted new concern. Stock prices fell sharply on the expectation that the Fed may need to boost interest rates further at its June meeting to prevent consumer prices from spiraling out of control. Still, some analysts remain hopeful that the Fed can steer a steady course between inflation and downturn: The economy may be less cyclical than in the past, when interest-rate hikes often prompted sharp housing downturns and then recessions.

It's possible that could happen again. Builders this week posted a third straight monthly drop in new-home starts, a key indicator of the current housing slowdown. And home prices in some markets are lower now than at the end of last year.

But bank credit is not drying up as it sometimes has in the past. At 6.6 percent, the interest on a 30-year fixed rate mortgage still makes many homes affordable by historical standards.

The rising cost of housing was one factor behind Wednesday's rise in the consumer price index.

Costs of shelter, clothing, and healthcare all rose in April, pushing the core rate of inflation up 0.3 percent for the month, higher than the 0.2 percent rate expected by forecasters. That means the core rate is now advancing at a 3 percent pace, up from a 2.2 percent rise for last year.

Consumer prices overall, driven by rising energy costs, are heading up at a 5.1 percent annual pace. They rose 3.4 percent last year.

Those energy costs are top of mind for many consumers.

"I would say that it's the biggest thing right now" driving consumer sentiment, says Raghavan Mayur of TechnoMetrica Market Intelligence in Oradell, N.J., a pollster who conducts the monthly TIPP survey of economic optimism.

It goes beyond sticker shock at the pump, he says. "They feel that their economic security is threatened" by America's reliance on the world oil market.

Not many people will cancel vacation plans outright due to fuel prices, predicts Sean Comey, a spokesman for AAA of Northern California in San Francisco.

But many are planning shorter trips, and coping with rising airfares by buying night or midweek tickets.

The good news for consumers is that their incomes may be going up, thanks to a tightening labor market. "Thirty percent of [business] owners say there's at least one opening they can't fill," says William Dunkelberg, chief economist at the National Federation of Independent Business.

But recent surveys, he adds, show that businesses are starting to pass higher labor costs along in the form of higher prices. "It's not good."

President Hugo Chavez said he was considering taking the step following a similar declaration by Iran.

Earlier this month, Iranian authorities gave backing for the launch of an oil exchange that traded solely in euros.

Some reports have suggested Iran's move may be part of a bid to undermine the importance of the dollar.

But in an interview with Channel 4 News in London, Mr Chavez said the move was merely a matter of choice.

"I think the European Union has made a large contribution with the euro," he said.

"So what the president of Iran says ... is recognising the power of Europe - they have succeeded in integrating and have a single currency competing with the dollar, and Venezuela might also consider that - we are free to do that," he added.

Dollar concerns

Experts have suggested that, should Iran demand payment for its exports in euros, central banks could opt to convert some of their dollar reserves to euros and therefore possibly trigger a further decline in the US currency.

The dollar has already come under pressure in foreign exchange markets in recent weeks, triggering nervousness in world stock markets.

Central banks, especially in Asia, who hold large amounts of the US dollar, could find the value of their foreign currency reserves substantially reduced.

Tensions rising

Iran is currently embroiled in a stand-off with the US in a row over its nuclear ambitions.

Iran, the second-largest exporter in oil producing nations group Opec, insists merely wants to build power stations, but the US claims it is building nuclear arms.

Meanwhile, Venezuela - the world's fifth largest oil producer - has been trying to reduce its dependence on the US, as relations have been strained under President Hugo Chavez.

In April it signed a joint venture with Cuba - a long time opponent of the US - to revamp an oil refinery and supply unrefined oil to the country.

Dave Lesar, the company's chairman and chief executive officer, said Wednesday the company planned to follow the initial offering with either additional public offerings or a sale to a competitor of the remaining 80 percent.

As a standalone company, KBR would have a better opportunity to prosper, Chief Financial Officer Christopher Gaut told about 200 shareholders. He described KBR as Halliburton's nearly lowest margin business and one that has seen contract activity in Iraq decrease.

A spin-off "would unlock the value of KBR for shareholders," Gaut said.

Shareholders of the world's largest provider of products and services to the petroleum and energy industries looked back on a year of record earnings. Halliburton, founded in 1919, earned $2.4 billion in 2005.

Shareholders approved a company request to increase its authorized share count to 2 billion from 1 billion. Lesar said a stock split was planned sometime in the next two months.

Shareholders rejected a request by a group of Texas and Kansas shareholders for adoption of a policy based on the Universal Declaration of Human Rights. Halliburton directors, noting that the company does business in more than 100 countries and refrains from doing business where prohibited by the U.S. government, did not support the proposal.

About 100 people protested outside the meeting. A masked man beat on a large empty jug and protesters chanted, "The whole world is watching," and "Shame on you," while police made the arrests. A designated area had been set up for the protest, and police had told protesters not to leave that area.

One of those arrested was wearing a Dick Cheney mask. The vice president formerly headed Halliburton, which has drawn criticism for its big government contracts, some awarded without competitive bidding. Its KBR unit provides support services for troops stationed in the Middle East.

Lesar said afterward that the protest did not bother him.

"I cannot change the fact that my predecessor is the vice president of the United States," he said.

Protesters carried signs such as "Bush Lied," and "Record Corrupt Blood Soaked Profits." Oklahoma Veterans for Peace lined up 37 pairs of combat boots to represent Oklahoma soldiers killed in Iraq.

"I think many Americans, myself included, are concerned that America is becoming a nation of, for and by corporate profits," said Nathaniel Batchelder, a member of the veterans group.

Jan Gaddis of Duncan held up an "I Support Halliburton" sign.

"It is not some monolithic organization that is devoid of humanity," she said. "They are a very responsible corporate citizen and their employees are involved in the local community and churches."

The Houston-based company said it decided to meet in the southern Oklahoma city of Duncan where it was founded to highlight company operations that remain here.

Critics accused it of seeking a friendly and remote location in an attempt to duck protests. The company is the leading employer in Duncan, which is about 80 miles south of Oklahoma City.

Halliburton spokeswoman Cathy Mann has said potential protests played no role in deciding where to hold this year's meeting. She said the company has done a good job of supporting American troops overseas.

"Halliburton supports the rights of demonstrators, even when they have the facts wrong," she said.

Halliburton shares fell $1.25 to close at $73.76 on the
New York Stock Exchange. The stock has traded from $39.65 to $83.97 over the last year.