NEW YORK — Wall Street fell sharply for a second straight session Tuesday after a hefty jump in wholesale inflation and a drop in new home construction gave investors more reason to believe an economic recovery is far off. The Dow Jones industrial average dropped 130 points.

The Labor Department said its Producer Price Index rose by 1.2 percent in July, more than double the expected rate, and lifting the current annual rate to the loftiest level in 27 years. Even after stripping out food and energy, core prices rose by a higher-than-expected 0.7 percent, the biggest increase since November 2006.

"Maybe investors were hoping to shrug off the challenges of high commodity prices and inflation," said Jack A. Ablin, chief investment officer at Harris Private Bank. "But now we find out that perhaps the inflation situation is worse than we thought."

A rebound in oil prices added to investors' anxiety, which had abated slightly in recent weeks as crude tumbled from its July record above $147 a barrel to three-month lows. That retreat has helped to drive the Dow back above 11,000 after it sank below that level in mid-July. But aside from August's commodities drop, there have been few bright spots on Wall Street this summer; the banks are forecasting more losses, the credit markets are still tight, the housing market remains in a slump, and the economy continues to lose jobs — all of which gives investors little reason to buy stocks.

The Commerce Department added to the heap of downbeat news Tuesday, reporting that July housing starts fell to an annual rate of 965,000 units — higher than analysts predicted, but the lowest level in more than 17 years nonetheless.

And the financial sector took another hit after a JPMorgan Chase & Co. analyst estimated that Lehman Brothers Holding Inc. will have to write down its investments during the third quarter by $4 billion, and a Goldman Sachs analyst advised against buying the stock of American International Group Inc.

With the nation's financial institutions low on available cash due to their poor investments in the mortgage markets, consumers and businesses are having a harder time getting loans — another hindrance for the economy.

According to preliminary calculations, the Dow fell 130.84, or 1.14 percent, to 11,348.55, after losing 180 points on Monday. It was the worst two-day performance for the blue-chip index since late June.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 11.90, or 0.93 percent, to 1,266.70, and the Nasdaq composite index fell 32.62, or 1.35 percent, to 2,384.36.

Declining issues outnumbered advancers by about 11 to 4 on the New York Stock Exchange, where volume came to 1.01 billion shares.

Anthony Conroy, managing director and head trader for BNY ConvergEx Group, pointed out that trading volumes were very low, which can exacerbate price movements. Still, he said, Tuesday's pair of government reports suggest a tough environment for stocks.

"Coupling the two, you have slow growth with higher inflation," Conroy said.

Bond prices were mixed. While investors often seek the shelter of government debt when bad news arrives, inflation is a deterrent because it devalues the debt's fixed returns. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.84 percent from 3.82 percent late Monday.

The dollar fell against other major currencies, driving up oil. Gold prices also turned higher.

Crude rebounded Tuesday by $1.66 to $114.53 a barrel on the New York Mercantile Exchange.

Lehman fell $1.96, or 13 percent, to $13.07. There have been reports swirling that the investment bank might have to sell part of the company to raise cash.

AIG shares fell $1.28, or 5.9 percent, to $20.32 after Goldman Sachs' analyst note, which predicted $9 billion to $20 billion in losses in the insurer's credit default swap portfolio. Credit default swaps are essentially insurance to protect against a bond default.

Retailers reported weak quarterly results, reflecting a pullback in consumer spending.

Home Depot Inc. reported a 24 percent decline in its second-quarter earnings. They topped Wall Street's expectations, but shares fell $1, or 3.7 percent, to $25.96.

Target Corp. said its second-quarter earnings fell 7.5 percent. It, too, beat forecasts but shares fell 33 cents to $49.72.

And Saks Inc. reported a wider-than-expected loss in the second quarter as its affluent shoppers cut back on apparel. The luxury goods retailer also issued a downbeat forecast for the year. Shares dropped 93 cents, or 8.3 percent, to $10.29.

The Russell 2000 index of smaller companies fell 11.94, or 1.61 percent, to 730.03.

Overseas, Japan's Nikkei stock average lost 2.28 percent. Britain's FTSE 100 fell 2.38 percent, Germany's DAX index fell 2.34 percent, and France's CAC-40 fell 2.61 percent.