The Commerce Department's latest retail sales figures showed a larger-than-expected increase in sales, indicating consumers' hunger for a wide variety of goods. While the data was evidence of an economy on sound footing, it also fed concerns that pent-up demand could drive prices higher.

Should economic reports over the next couple of weeks continue on this track — particularly a key gauge of inflation due out tomorrow — the Federal Reserve may feel the need to raise interest rates by a half percentage point at the end of the month, instead of the quarter point Wall Street has been expecting.

"The benign pace of rates the market has discounted may not be the case now," said Russ Koesterich, U.S. equity strategist at State Street Corp. "That doesn't really make stocks look attractive. There's no real reason to go out and sell everything you own, but no real catalyst to buy, either."

According to preliminary calculations, the Dow Jones industrial average sagged 75.37, or 0.7 percent, to 10,334.73.

Broader stock indicators were also lower. The Standard & Poor's 500 index was down 11.21, or 1 percent, at 1,125.26. The Nasdaq composite index dropped 29.88, or 1.5 percent, to 1,969.99.

Financial stocks were hit the hardest, along with technology shares and other companies dependent on ready capital, which would become more expensive as rates go higher.

Retail sales were up 1.2 percent in May, 0.2 percent higher than expected, the Commerce Department said. Automotive sales rose a strong 2.7 percent, the biggest gain since November, while all other goods were up 0.7 percent for the month. In contrast, April's retail sales fell 0.6 percent.

Consumers also want foreign-made goods. The U.S. trade deficit rose to a record $48.3 billion in April, up 3.8 percent from March's previous all-time high, the Commerce Department said in a separate report. Higher oil prices contributed to the new record, as well as a drop in U.S. exports.

Investors worried that these figures might be a precursor to a jump in tomorrow's Consumer Price Index report, a key measure of inflation.

"My suspicion is that the market is nervous ahead of that CPI report, since it could give the Fed increased opportunity to raise interest rates," said Brian Bush, director of equity research at Stephens Inc. "With the Fed promising to be more aggressive on inflation, it suggests that the Fed is now looking for a reason, almost."

In corporate news, MGM Mirage Inc. raised its bid for Mandalay Resort Group, now offering $71 a share for the rival casino operator, up from the previously rejected offer of $68 per share. The deal was negotiated with Mandalay, and is likely to be approved. Mandalay dropped 82 cents to $67.60, while MGM Mirage gained 60 cents to $48.20.

Nokia Corp. fell 16 cents to $14.08 after announcing production of five new cell phones.

RealNetworks Inc. and Starz Encore Group LLC, a Liberty Media Corp. subsidiary, launched a joint Internet subscription movie service, offering 100 movies per month for $12.95. RealNetworks was up a penny at $6.01, while Liberty Media fell 20 cents to $9.19.

Declining issues outnumbered advancers by more than 4 to 1 on the New York Stock Exchange. Volume came to 1.25 billion shares, compared to 1.23 billion on Thursday.