While the Labor Department's producer price index showed that high energy costs have not yet affected core wholesale prices — without food and energy — a stronger-than-forecast jump in overall PPI compounded concerns that soaring oil prices will inevitably drive other prices higher.

A drop in new home construction fed hopes that economic growth is tapering and could bring an end to the Federal Reserve's campaign to boost interest rates and contain inflation. But a strong reading on industrial activity and a fresh rise in crude oil nonetheless kept investors on edge.

"When you add up all the numbers, the economy is doing well, but there's still a hint of inflation around," said Larry Wachtel, a market analyst for Wachovia Securities. "I can't really say anything today would persuade the Fed to stop raising rates in June."

The mixed economic numbers muddled the outlook for interest rates and countered excitement over solid earnings from Wal-Mart Stores Inc. and a rebound in bonds. Investors were already looking ahead to tomorrow's report on consumer prices for more clarity about the inflation picture.

At the close of trading, the Dow Jones industrial average lost 8.88, or 0.08 percent, to 11,419.89.

Broader stock indicators also declined. The Standard & Poor's 500 index dropped 2.42, or 0.19 percent, to 1,292.08, and the Nasdaq composite index fell 9.39, or 0.42 percent, to 2,229.13.

Bonds continued their recovery from recent lows, with the yield on the 10-year Treasury note dropping to 5.1 percent from 5.16 percent late yesterday. The 10-year Treasury yield reached 5.19 percent on Friday, the highest level since May 2002.

Meanwhile, the U.S. dollar lost ground to the Japanese yen and was little changed against European currencies. Gold prices bounced back after falling sharply to $685 an ounce in the prior session.

Crude futures inched upward following two days of selling, and as the market awaited the government's weekly inventory update tomorrow. A barrel of light crude rose 12 cents to settle at $69.53 on the New York Mercantile Exchange.

While Wall Street is always sensitive to economic data, investors have been particularly anxious since the Fed last week said it may pause its series of interest rate hikes if economic conditions warrant it. One of the Fed's primary concerns is keeping inflation in check, so any signs of rising prices or a too-robust economy is likely to unnerve the stock market.

"I'm surprised the market didn't sell off more as a result of the PPI and housing numbers," said Steve Neimeth, senior vice president and portfolio manager at AIG SunAmerica. "Interest rate expectations are way too low in light of this data."

Neimeth said investors appeared to be confused about the inflation picture after the Labor Department said core wholesale prices grew 0.1 percent in April versus estimates for a 0.2 percent rise. The overall PPI jumped 0.9 percent, beating targets of 0.8 percent.

Elsewhere, the Commerce Department said housing starts dropped 7 percent to 1.85 million in April — below estimates of 1.95 million — as rising mortgage rates showed signs of tempering demand. The number of building permits issued also fell 5 percent to 1.98 million.

But a Fed report that industrial production increased 0.8 percent last month renewed some worries about strong growth driving inflation, coming in ahead of forecasts for 0.5 percent. Capacity utilization of 81.9 percent was up slightly from 81.4 percent a year ago.

Aside from economic data, earnings news dominated the day's headlines. Dow component Home Depot Inc. said profit climbed 19 percent in the first quarter, but its sales came in shy of estimates. Home Depot fell $2.05 to $38.45 and contributed to the Dow's decline.

Wal-Mart posted a modest 6 percent rise in quarterly income, beating analysts' target by 2 cents per share. Its sales also edged up 12 percent to match expectations. Wal-Mart gained 64 cents at $48.07.

Deere & Co. climbed $1.79 to $89.31 after saying its earnings grew 23 percent last quarter, boosted by a modest lift in sales of its tractors and farm equipment.

Advancing issues led decliners by 17 to 16 on the New York Stock Exchange, where preliminary consolidated volume of 2.44 billion shares lagged the 2.62 billion that changed hands yesterday.

The Russell 2000 index of smaller companies added 0.18, or 0.02 percent, to 737.46.

Overseas, Japan's Nikkei stock average slumped 1.99 percent. Britain's FTSE 100 rose 0.08 percent, Germany's DAX index lost 0.09 percent and France's CAC-40 was higher by 0.33 percent.