Continuing a weeks-long pattern, Wall Street fell on good economic news that it believed would motivate the Fed to raise rates. The Labor Department reported that the number of people filing new claims for unemployment insurance fell last week to the lowest level since October 2000, a far greater decline than analysts had anticipated.

The drop added to the market’s suspense about the government’s monthly jobs report, scheduled for release tomorrow.

"The unemployment claims are fueling speculation that tomorrow’s numbers may be better than expected, so that raises the question about when the Fed will pull the trigger on rates," said Peter Cardillo, chief strategist with S.W. Bach & Co. "So the bears have taken full control."

According to preliminary calculations, the Dow Jones industrial average shed 69.69, or 0.7 percent, to 10,241.26, but was well off the lows of the session.

The broader gauges were also lower. The Nasdaq composite index sank 19.52, or 1 percent, to 1,937.74. The Standard & Poor’s 500 index fell 7.57, or 0.7 percent, to 1,113.96.

Rising oil prices, apprehension over the U.S. campaign in Iraq and the prospect of higher rates have overshadowed positive economic data and strong corporate earnings.

While Wall Street has assigned a great deal of significance to the expected hike, most analysts agree it will not have a lasting negative impact on stock prices or economic activity because rates currently stand at 46-year lows. Nonetheless, predictions that the Fed could take action as early as June have made the market jittery.

Contributing to investors’ anxiety, Greenspan told a banking conference today that the federal budget deficit could represent a major obstacle to long-term economic stability. The deficit will amount to 4.25 percent of the total economy after it climbs to an estimated $500 billion this year.

In addition, persistent unrest in the Middle East has heightened concern that terrorist acts could disrupt oil production. Oil is now trading at its highest level since the run-up to the Gulf War in 1990, and analysts say it could easily top $40 a barrel.

"If we could attribute all of the stock-market weakness simply to concerns about interest rates, then it would be an overreaction, but it’s not the only factor," said Susan L. Malley, chief investment officer for Malley Associates Capital Management.

Along with oil prices, Iraq and other international tensions, high valuations have also contributed to the market’s volatility, she said.

"Prices are not really cheap now," Malley said. "We can still find undervalued stocks, but it’s harder. To some extent I think stocks just needed to pause."

Consumers’ enthusiasm for buying seemed to wane in April as the pace of retail sales cooled following a brisk first-quarter performance. Wal-Mart Stores Inc. lost $1.28 to $54.58 after it reported disappointing results.