Data showing unit labor costs rose a higher-than-expected 1.8 percent, raising concerns of inflationary pressures. The Labor Department also as expected reported that productivity waned in the first quarter. The readings did little to alleviate investor concerns that the inflation-wary Federal Reserve might lean toward raising rather than lowering rates later this year.

The inflation jitters came alongside the European Central Bank's widely expected decision to raise its key interest rate by a quarter of a percentage point to 4 percent. Stocks in Europe fell sharply.

"In the last week or two, the expectation that the Fed was going to lower interest rates in the next six months has been put to the side so the bond market has reacted," said George Shipp, chief investment officer at investment adviser Scott & Stringfellow, referring to a recent rise in bond yields as investors saw a reduction in interest rates as less likely. Yields move higher as bond prices fall.

He said investors shouldn't read too much into the pullback in stocks.

"The market has come a long way. We're down for a couple days but we've been up for 11 out of the last 12 months. Right now you'd have to call it normal profit taking."

MAJOR INDEXES END DOWN

According to preliminary calculations, the Dow fell 129.79, or 0.95 percent, to 13,465.67.

Broader stock indicators also fell. The Standard & Poor's 500 index fell 13.57, or 0.89 percent, to 1,517.38, and the Nasdaq composite index fell 24.05, or 0.92 percent, to 2,587.18.

The decline Wednesday came a day after the three major indexes slumped after remarks from Fed Chairman Ben Bernanke and service sector data hinted that the economy is on the rebound, lowering the chance of an interest rate cut. But despite the fresh concerns about inflation, the economic picture doesn't appear to have changed substantively from last week when the S&P 500 broke a seven-year-old closing record and the Dow continued to hit fresh highs.

"I think the underlying fundamentals that have gotten us to this point — global growth, excellent corporate profitability, obviously a lot of merger activity — haven't changed," Shipp said.

Wall Street kept a close eye on the Treasury market as the 10-year note's yield approaches 5 percent, a level not seen since August 2006. Bonds rose as stocks fell; the yield on the benchmark 10-year Treasury note fell to 4.97 percent from 4.98 percent late Tuesday.

The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude rose 35 cents to $65.96 per barrel on the New York Mercantile Exchange.

Along with the Labor Department data, the stock and bond markets received comments from Fed officials. Richmond Fed President Jeffrey Lacker, speaking in Frederick, Md., remained concerned about inflation but said the economy appeared poised for increased growth. Kansas City Fed President Thomas Hoenig said the economy is likely to slow as the year continues.

Douglas Pyle, a managing director at U.S. Trust Co., contends that after the run-up in stocks in recent months a pullback was overdue.

"You have all this stuff that really I think is just noise. We've had such a move that's been uncorrected that it's probably long overdue that something like this happens. It's normal and I think it's healthy. I think the longer-term picture for equities in the U.S. is quite positive."

SPECULATION ABOUT TAKEOVERS FAIL TO BOOST MOOD

Fresh speculation about takeovers failed to break Wall Street's downcast mood. Two hedge funds that own stakes in TD Ameritrade Holding Corp. are pushing the online brokerage firm to join forces with either E-Trade Financial Corp. or Charles Schwab Corp. TD Ameritrade jumped 76 cents, or 3.8 percent, to $20.71.

In other corporate news, Panera Bread Co. fell $8.04, or 13.8 percent, to $50.28 after the restaurant chain reduced its forecasts for second-quarter profits and same-store sales, or sales at stores open at least a year.

XTL Biopharmaceuticals Ltd. fell 63 cents, or 17.7 percent, to $2.90 after the company halted development of a hepatitis C drug candidate after determining it was no more effective than a placebo in reducing patients' viral load in an early stage clinical trial.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 1.55 billion shares compared with 1.51 billion traded Tuesday.

The Russell 2000 index of smaller companies fell 7.04, or 0.83 percent, to 841.21.

In other overseas trading, China's benchmark Shanghai Composite Index rose 0.2 percent, while Japan's Nikkei 225 index fell 0.07 percent. Britain's FTSE 100 fell 1.66 percent, Germany's DAX index fell 2.40 percent, and France's CAC-40 fell 1.66 percent.

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