The Fed's decision to boost a key short-term lending rate to 5 percent was widely anticipated. But investors were rattled by the central bank's accompanying statement, which said more policy firming — or rate hikes — could be necessary to contain inflation. The Fed indicated it would be closely watching economic data to determine its next step.

Investors had grown hopeful that recent signs of a cooling economy would prompt the Fed to stop lifting rates. However, the prospect of more increases dampened the market's celebration and stocks briefly fell.

Ken McCarthy, chief economist for vFinance Investments, said the Fed will likely not raise interest rates at its June meeting to give it more time to assess the economy, adding that the central bank's stance is ultimately positive for equities in the long term.

"The Fed realizes that the tightening they've already done hasn't had its full impact," McCarthy said. "The numbers we're getting now reflect the funds rate at 4 percent. The Fed wants to see the effect of 4.5 percent or 5 percent, and we won't see that until later this year."

Bonds, which have been plagued by rising interest rates, sold off their earlier gains following the Fed's statement. The yield on the 10-year Treasury note had fallen to 5.09 percent early in the session but recently was flat at 5.13 percent.

At the close, the Dow rose 2.88, or 0.02 percent, to 11,646.65. The Dow is less than 80 points from its best-ever close of 11,722.98, reached Jan. 14, 2000.

Broader stock indicators declined. The Standard & Poor's 500 index lost 2.29, or 0.17 percent, to 1,322.85, and the Nasdaq composite index sank 17.51, or 0.75 percent, to 2,320.74.

The chance for more interest rate increases weighed on the dollar, which fell against the Japanese yen. Meanwhile, gold prices climbed past a 25-year high of $700 an ounce.

Today's increase lifted the federal funds rate to stand at 5 percent, the Fed's 16th consecutive quarter percentage point raise since June 2004. The central bank began boosting rates from historic lows in an effort to stifle an overheating economy and keep inflation in check.

Although investors have always been mindful of economic data, upcoming reports on wholesale and consumer prices, factory utilization and job growth could cause severe volatility in the coming weeks as Wall Street resumes its habit of trying to predict the Fed's next interest rate move.

"If the economy doesn't slow as expected, or inflation becomes a bigger problem for financial markets, the Fed has stated that it won't hesitate to start raising rates again," said Michael Sheldon, chief market strategist at Spencer Clarke LLC.

Crude oil futures rebounded today as worries about overseas supply cutoffs countered a weekly government report showing increased oil and gasoline reserves and greater refinery output. A barrel of light crude gained $1.44 to $72.13 on the New York Mercantile Exchange.

Cisco Systems Inc. posted a slight drop in quarterly profit but still managed to top Wall Street estimates. However, the company's conservative outlook spooked tech investors. Cisco fell 93 cents to $20.75.

Disney said its earnings grew 12 percent last quarter, helped by strong television ratings and increased theme park attendance. Disney rose 53 cents to $30.11.

Federated said costs from acquiring May Department Stores Co. caused it to post a slight loss for the first quarter. The Macy's and Bloomingdale's owner also pegged its second-quarter results below analyst targets. Federated dropped 97 cents to $77.98.

Whirlpool Corp. is closing three plants and slashing 4,500 jobs following its acquisition of rival appliance maker Maytag Corp. Whirlpool lost 92 cents to $92.17.

Declining issues led advancers by about 9 to 7 on the New York Stock Exchange, where volume of 1.22 billion shares leaped past the 1.14 billion shares that changed hands yesterday.

The Russell 2000 index of smaller companies lost 4.78, or 0.61 percent, to 775.94.

Overseas, Japan's Nikkei stock average tumbled 1.39 percent. Britain's FTSE 100 lost 0.36 percent, Germany's DAX index fell 0.36 percent and France's CAC-40 was lower by 0.64 percent.