Investors' fears of an economic slowdown were heightened after Wal-Mart missed Wall Street's profit expectations for the quarter and, more importantly, said high gasoline prices have hurt customer spending and will affect the company's second-quarter results.

That put a damper on a very positive Commerce Department report, which showed a 1.4 percent increase in retail sales, the best gain in six months. Analysts had been expecting a rise of 0.8 percent.

Combined with oil falling below $49 per barrel, the balance of news could be swinging in the market's favor, but investors' pessimism instead sent stocks falling.

"Wal-Mart is overshadowing it, but the fact remains the economic news is good. It indicates that the mild slowdown in economic activity we've seen is probably going to be short lived," said Peter Cardillo, chief strategist and senior vice president at S.W. Bach & Co. "We'll probably have a belated positive reaction over the next day or two once the effects of Wal-Mart begin to dissipate."

The Dow fell 110.77, or 1.08 percent, to 10,189.48. The index lost 103.23 points on Tuesday and is down 1.51 percent for the week so far.

Broader stock indicators also lost considerable ground. The Standard & Poor's 500 index was down 11.75, or 1 percent, at 1,159.36, and the Nasdaq composite index fell 7.67, or 0.39 percent, to 1,963.88.

The price of oil price dropped sharply for a second straight session. But it remains high enough going into the summer driving season to exacerbate worries of an economic slowdown as consumers spend more on gasoline and less on everything else. A barrel of light crude settled at $48.54, down $1.91, on the New York Mercantile Exchange — near an 11-week low.

Falling crude futures took shares of oil companies lower as well. Exxon Mobil Corp. lost $2.47 to $54.82, while Chevron Corp. fell $1.35 to $52.05.

The bond market edged higher as stocks fell, with the yield on the 10-year Treasury note falling to 4.17 percent from 4.18 percent late Wednesday. The dollar rose to a 2005 high against the euro and made gains against other major currencies. Gold prices fell.

Investors continued to focus on the Federal Reserve and interest rates, despite the good economic news. Many on Wall Street are concerned that higher rates could choke off economic growth, but also that inflation may take hold if rates are too low.

"It's clear that the economy is growing, and it's growing in a way you'd hope it would be in this point in the cycle," said Hans Olsen, managing director and chief investment officer at Bingham Legg Advisers in Boston. "The economy is throwing a party and the stock market's not attending."

While profits at Wal-Mart rose 14 percent from the first quarter last year, the company's warning on its second-quarter earnings unnerved investors who have grown accustomed to strong gains at the nation's largest retailer. Wal-Mart skidded 95 cents to $47.65 after missing analysts' expectations by a penny per share and saying that its 2005 profit forecasts could be difficult to achieve.

Target Corp. climbed 60 cents to $48.80 after the retailer posted robust sales for the quarter and saw earnings rise 15 percent. The company beat Wall Street's profit forecasts by 2 cents per share.

Embattled Wall Street firm Morgan Stanley dropped 45 cents to $49.40 after a group of dissident shareholders publicized their plan to spin off the company's investment banking business from the rest of the firm, essentially reversing its 1997 merger with Dean Witter & Co. The dissidents claim their plan was developed with the help of institutional shareholders.

3M Co. has agreed to purchase filtration products maker Cuno Inc. for $1.35 billion in cash and assumed debt, a deal that would expand 3M's reach in the liquid- and gas-filtration market. 3M lost $1.21 to $75.78, while Cuno surged 29.2 percent, or $16.03, to $70.85.

Ameritrade Holding Corp. added 4 cents to $13.80 after the company said it is not for sale, rebuffing a takeover offer from E-Trade Financial Corp. E-Trade was down 34 cents at $12.04 on the news.

Declining issues outnumbered advancers by more than 5 to 2 on the New York Stock Exchange, where preliminary consolidated volume came to 2.06 billion shares, compared with 1.89 billion on Wednesday.

The Russell 2000 index of smaller companies was down 8.68, or 1.5 percent, at 586.89.