According to the minutes of the Federal Open Market Committee's Dec. 14 meeting, a number of Fed officials said a drop in productivity growth, a weakening dollar and high oil prices could all contribute to inflation, and they hinted that interest rates may have to rise more aggressively to strengthen the dollar and curb inflation.

The Fed had been promising steady, measured hikes in rates; the benchmark federal funds rate stands at 2.25 percent following the Fed's quarter percentage point increase in December.

The release of the minutes led to a sharp drop in stock prices and a jump in trading volume, exacerbating losses in a session in which investors sold small-cap stocks and riskier investments for a second straight day.

"The Fed's comments really turned a day of light profit-taking into a day of significant profit-taking," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "Clearly, the way the market started off the new year will make investors nervous, and that could feed on itself over the next few days and drive things even lower before it settles down."

According to preliminary calculations, the Dow Jones industrial average fell 98.65, or 0.9 percent, to 10,630.78.

Broader stock indicators fell sharply. The Standard & Poor's 500 index lost 14.04, or 1.2 percent, to 1,188.04, and the Nasdaq composite index tumbled 44.29, or 2.1 percent, to 2,107.86, posting its biggest one-day decline since Aug. 6.

The losses over the past two days erased substantial gains from the past month, with the Dow and the S&P reaching their lowest levels since the second week of December and the Nasdaq falling to its lowest close since Nov. 30.

The selling was intensified by climbing oil prices, with tight supplies of heating oil and evidence that Saudi Arabia was cutting back on production blamed for the increase. A barrel of light crude settled at $43.91, up $1.79, on the New York Mercantile Exchange.

Still, analysts were hesitant to call the past two days of selling a reversal of the November and December rally, noting that Friday's job creation report from the Labor Department and the start of fourth-quarter earnings season next week could give stocks a boost and extend Wall Street's postelection rally. However, a shortfall in new jobs or disappointing earnings could do the opposite.

Wall Street pushed automakers' stocks lower as they announced their December sales figures.

Ford Motor Co. fell 5 cents to $14.66 after it said last month's sales fell 3.6 percent and 2004 sales were down 4.9 percent.

General Motors Corp. reported a 7 percent drop in December sales, and a 1.4 percent drop for the year, sending GM stock down 41 cents at $39.89.