Standard & Poor's decision to lower the automakers' debt ratings dragged down the rest of the market, which was already nervous ahead of the Labor Department's job creation report tomorrow. The debt downgrade came one day after stocks surged in response to billionaire investor Kirk Kerkorian's announcement that he took a large stake in embattled GM.

"The market shouldn't be dropping this much just because of two companies in one sector. Everyone knew Ford and GM were hurting, no matter what Kerkorian did yesterday," said Brian Pears, head equity trader at Victory Capital Management in Cleveland. "It shows the skittishness of this market. Any feelings of bullishness we may have had are very tentative still."

The Dow Jones industrial average fell 44.26, or 0.43 percent, to 10,340.38, ending a four-day winning streak. Much of the loss could be attributed to GM's falling stock price.

Broader stock indicators were narrowly lower. The Standard & Poor's 500 index was down 3.02, or 0.26 percent, at 1,172.63, and the Nasdaq composite index lost 0.43, or 0.02 percent, to 1,961.80.

Crude oil futures moved sharply higher in afternoon trading after an industry consulting firm issued a report that projected higher energy prices. A barrel of light crude settled at $50.83, up 70 cents, on the New York Mercantile Exchange.

The bond market moved sharply higher as the automakers' debt downgrades sent investors looking for safer government issues. The yield on the 10-year Treasury note fell to 4.15 percent from 4.19 percent late yesterday. The dollar was lower against most major currencies, while gold prices rose.

Before the automakers' downgrades, stocks traded narrowly higher as investors marked time ahead of Friday's important job creation report from the Labor Department. The market had been up for four straight sessions, and some analysts had started talking about sustained improvement in the markets. However, the market's mood proved too tentative to keep the rally going.

"People are still pessimistic," said Scott Wren, equity strategist for A.G. Edwards & Sons. "I think we saw the bulk of the panic selling a few weeks ago, but while the market is stabilized, we're still getting mixed news."

Wall Street had welcomed a Labor Department report showing a 2.6 percent annualized hike in worker productivity in the first quarter, the best increase in nine months. The report also noted that labor costs, while climbing, rose less than productivity — which means companies are getting more out of their workers without undue costs.

Retailers' sales reports showed gains at traditional department stores and wholesale clubs, but slower growth at big discount chains — a sign that lower-income Americans might be spending less due to higher gasoline prices.

The bad news for Ford and GM had an immediate effect on the markets and sent the automakers' shares tumbling. GM dropped $1.94 to $30.86 while Ford shed 46 cents to $9.70. Both automakers disputed S&P's reasoning for the downgrades.

Merck & Co. dropped 18 cents to $34.75 after the drug maker said Chairman and Chief Executive Raymond Gilmartin was leaving the company, to be replaced as CEO by Richard Clark, president of Merck's manufacturing division. A new chairman has not been named. Gilmartin was criticized for his handling of Vioxx, which was pulled from the market last year due to health risks.

IBM Corp. announced a restructuring that will result in up to 30,000 lost jobs, mostly in Europe, though some U.S. layoffs are expected. The restructuring comes after a disappointing first quarter for IBM, which has been plagued by dropping revenues in Europe. IBM was down $1.58 at $75.50.

Traditional department stores fared well in April's retail sales reports, but big discount chains had lower-than-expected sales. Wal-Mart Stores Inc. rose 12 cents to $48.57 and Target Corp. gained $1 to $47.28 although their sales were below Wall Street expectations. Federated Department Stores Inc. surged $2.20 to $62.37 and J.C. Penney Co. Inc. added 37 cents to $48.12 as both stores' April sales far surpassed analysts expectations.

Gillette Co. fell 43 cents to $52.42 after the consumer products manufacturer said earnings rose 19 percent in the first quarter and beat Wall Street forecasts by 2 cents per share. The company said earnings growth was slowed by a factory closure and costs associated with its planned merger with Procter & Gamble Co. P&G lost 36 cents to $54.78.

Advancing issues barely outnumbered decliners on the New York Stock Exchange, where preliminary consolidated volume came to 2.05 billion shares, compared to 2.32 billion yesterday.

The Russell 2000 index of smaller companies was up 0.42, or 0.1 percent, at 595.64.

Overseas, Japan's markets were closed for a national holiday. In Europe, Britain's FTSE 100 closed up 0.41 percent, France's CAC-40 gained 0.8 percent for the session, and Germany's DAX index rose 0.82 percent.