A Labor Department report that wages rose at an annual rate of 4.9 percent in the second quarter, above the 4.2 percent the agency estimated, was an unpleasant surprise for a market that had reached three-month highs on hopes of stable rates. For the first quarter, the department said labor costs jumped 9 percent.

The market also found little solace in a report from the Institute for Supply Management that showed the services sector grew at a faster pace in August than economists forecast. An economy still showing this type of growth could make it easier for the Fed to justify a rate hike to fight inflation. The central bank left rates unchanged at its last meeting after a string of 17 straight increases; its next meeting is Sept. 20.

Stocks drifted even lower this afternoon after release of the Fed's "beige book," which found that while economic growth continued in the fall, five of the Fed's 12 districts showed deceleration. The findings that the housing market slowed could also bolster the arguments of some that the economy at large could suffer if consumer spending slows as a result.

One of the market's greatest fears is that although the economy might continue to slow, the Fed will resume its course of rate hikes as it seeks above all to forestall inflation. Both pose a threat to corporate profits.

According to preliminary calculations, the Dow Jones industrial average fell 63.08, or 0.55 percent, to 11,406.20.

The tech-heavy Nasdaq composite index and the Standard & Poor's 500 index showed steeper declines. The Nasdaq dropped 37.86, or 1.72 percent, to 2,167.84, in part as Intel Corp. declined following a widely expected announcement of job cuts.

The S&P 500 was down 12.99, or 0.99 percent, at 1,300.26, while the Russell 2000 index of smaller companies fell 15.46, or 2.13 percent, to 712.04.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 1.45 billion shares, compared with 1.35 billion yesterday.

"I think people are still looking over their shoulders in terms of labor costs," said Jon Brorson, head of growth equities at Neuberger Berman in Chicago.

Brorson said he would be cautious about jumping into stocks following the gains seen this summer and that he is surprised the market hasn't ceded more ground. "You've got a situation where the Fed is trying to fine-tune this economy. There's no guarantee they're going to get it right."

The declines in stocks under the weight of economic news came despite recent lows in the price of oil. Crude prices, which have recently been above $70 a barrel, fell amid a perhaps temporary easing of tensions with Iran over its nuclear ambitions, an end to the summer driving season as well as news that one Gulf of Mexico platform is now producing 20 percent more than before it was struck by Hurricane Katrina. Crude prices settled down $1.10 at $67.50 a barrel on the New York Mercantile Exchange. The decline hurt oil stocks today.

Bonds fell on investor disappointment with today's economic data. The yield on the benchmark 10-year Treasury note climbed to 4.80 percent from 4.78 percent yesterday. The yield hit a five-month low of 4.73 percent Friday. The dollar was mixed compared with most major currencies, while gold fell.

Ford Motor Co. rose 16 cents to $8.55, after announcing it tapped Boeing Co.'s Alan Mulally to serve as chief executive to replace Bill Ford. Mulally is credited with helping turn around aerospace company. Boeing fell 92 cents to $74.44, amid concerns over Mulally's departure.

Ford rival General Motors Corp. increased 73 cents, or 2.40 percent, to $31.17 after announcing plans to increase the warranties on its cars and trucks.

Intel fell 68 cents, or 3.40 percent, to $19.31, after announcing it would cut 10,500 jobs. Some on Wall Street had hoped the cuts would be deeper.

Overseas, Japan's Nikkei stock average closed down 0.62 percent. Britain's FTSE 100 was down 0.88 percent, Germany's DAX index was down 1.21 percent, and France's CAC-40 was down 1.11 percent.