The selloff was spurred by the Commerce Department’s report of a 1.8 percent increase in retail sales for March, the biggest jump in a year. It was three times the 0.6 percent rise economists expected.

That raised the specter of inflation, and investors worried that the Federal Reserve might raise interest rates soon to keep the economy from growing too fast. A hike before year’s end could put President Bush’s re-election into question, according to Hugh Johnson, chief investment officer at First Albany Corp.

"That worries investors that we’re going to see a Democratic administration, which might roll back the 15 percent tax rate on capital gains and dividends," Johnson said. "It’s a whole string of dominoes. If this weren’t an election year, you’d see earnings and economics outweigh the interest rate concerns."

While the retail data helped the markets open higher, the major indexes quickly slipped into negative territory and fell sharply in afternoon trading. According to preliminary calculations, the Dow was off 134.28, or 1.3 percent, at 10,381.28 — its biggest one-day drop since March 25.

The Standard & Poor’s 500 index was down 15.78, or 1.4 percent, at 1,129.42, also the worst point loss since March 25.

The Nasdaq composite index fell 35.40, or 1.7 percent, to 2,030.08, the Nasdaq’s biggest loss since April 2.

The selling was broad, with every major sector losing ground, since rising interest rates could make borrowing difficult for most companies. But Stuart Freeman, chief equity strategist for A.G. Edwards & Sons, said there’s still a chance the Fed might hold off on a rate hike until the end of the year.

"I think the Fed will want to see more than one really strong employment number and maybe a few more numbers like this retail figure before they move," Freeman said, alluding to the 308,000 jobs created in March.

In the meantime, with earnings season under way, healthcare products maker Johnson & Johnson and investment firm Merrill Lynch & Co., two closely watched stocks, both surpassed Wall Street estimates in announcements before the start of trading. But these were overshadowed by the interest rate worries, and might not have been impressive enough to move the market anyway.

"Investors want to be awed. It’s come to that, quite frankly," said John Lynch, chief market analyst at Evergreen Investments. "We have the market expecting 17 percent, so it better be 20 percent for the market to be really impressed."

Strong sales and favorable exchange rates spurred a 20 percent hike in profits at Johnson & Johnson, which beat estimates by 3 cents a share and gained 19 cents to $51.39. Merrill Lynch slumped $1.12 to $58.61 after record first-quarter earnings of $1.22 per share, beating expectations by 15 cents a share.