Renewed Concerns Over Fed Rate Hike Send Dow Index Sliding 140 to 7,085

The roller-coaster ride otherwise known as the U.S. stock market hit another downslope Wednesday, as blue-chip shares plummeted in the wake of rising bond yields and a falling dollar.

The Dow Jones industrial average tumbled 139.67 points, or 1.9%, to 7,085.65, after surging 249 points to a record high over the previous three sessions.

The broad market didn’t fare as badly Wednesday, but analysts said the fresh dive in blue chips demonstrated how skittish Wall Street remains, as investors weigh the direction of the economy, interest rates and the dollar.

“We had a three-week sabbatical [from interest rate and inflation worries] and now we’re going to take some of the hot air out of the balloon,” said Don Hays, investment strategist at brokerage Wheat First Butcher Singer in Richmond, Va.

Analysts also warned that the market’s wild volatility of recent months isn’t likely to dissipate soon, with investors still unsure what the Federal Reserve Board will do with interest rates at its May 20 policy meeting, and with changes in the capital-gains tax rate pending on Capitol Hill.

On Wednesday, profit-taking in stocks was fueled in part by a jump in bond yields after the government reported a smaller-than-expected rise in worker productivity in the first quarter, while labor costs continued to rise.

That report seemed to overshadow the Fed’s own Beige Book report on regional economic activity, which painted a picture of moderate growth with low inflation.

Despite the Beige Book, two Fed officials in separate public appearances echoed the central bank’s long-standing concerns about tight labor markets and high levels of factory activity.

“Any little whisper along those lines is interpreted as a Fed that’s somewhat on the side of raising interest rates,” Hays said. “It’s the interpretation of the moment. Last week it was the opposite interpretation.”

After diving in March and April, stocks had rocketed last week as bond yields fell to eight-week lows on hopes that the Fed might refrain from additional interest-rate hikes.

On Wednesday, bond yields rose across the board, with the yield on the benchmark 30-year Treasury bond ending at 6.96%, up from 6.89% Tuesday and the highest since April 29.

Some traders also cited disappointing demand at the Treasury’s auction of new 10-year notes. The notes’ average yield was 6.74%.

A weak dollar didn’t help the bond market. The dollar fell to its lowest level in a month against the Japanese yen after a news report said Japan, the U.S. and Germany were planning to sell dollars for yen, to weaken the dollar.

In New York, the dollar closed at 124.97 yen, down from 125.38 at Tuesday’s close. A falling dollar makes foreign investors less likely to buy U.S. assets such as bonds because of devaluation concerns.

In the stock market losers topped winners by nearly 2 to 1 on the New York Stock Exchange in continued heavy trading. The Standard & Poor’s 500 index dropped 1.5% to 815.62 and the NYSE composite slid 1.4%.

The Nasdaq market of mostly smaller stocks held up much better. Losers had a slight edge over winners, and the composite index slipped 5.39 points, or 0.4%, to 1,322.91. But the Nasdaq index did not top its previous high during the recent rally. The index remains nearly 5% below the record high set in January .

Many analysts worry that the market’s ongoing volatility will make it harder to keep investors interested for very long.

“Certainly if rates keep rising and volatility keeps going along the way it has, that’s going to give investors cause to pause and think about what it is they’re doing,” said Charles White, managing director at Avatar Associates.

Among Wednesday’ highlights:

* Financial services issues were slammed anew on worries about higher interest rates. J.P. Morgan sank 3 1/2 to 101 3/8, Travelers dropped 2 1/2 to 54 3/8, American Express sank 2 3/8 to 66, Chase Manhattan fell 2 7/8 to 95 3/8, Citicorp fell 3 1/4 to 113 3/4 and Wells Fargo skidded 9 1/4 to 267 1/4.

* Utility stocks also tumbled, with the Dow utility stock index sinking 4.05 points, or 1.8% to 223.94.

* Blue-chip losers included Boeing, down 2 3/4 to 98; Dupont, down 3 1/4 to 107; IBM, down 2 7/8 to 162 1/8; and Caterpillar, down 2 to 92 3/8.

* Tech issues were mixed. Cisco Systems, which late Tuesday issued a quarterly earnings report that met forecasts, rose 1 to 58 3/4; 3Com rose 1 3/8 to 37 1/8; and its proposed merger partner U.S. Robotics climbed 1 3/4 to 37 1/2.

Computer chip makers jumped after Merrill Lynch said demand for chips and PCs remains strong. Texas Instruments rose 1 7/8 to 93 7/8, Motorola gained 3/8 to 61 3/8. But Intel dropped 2 1/8 to 155 7/8.

* Irvine-based engineering concern Fluor slumped 2 1/8 to 47 7/8 after it said it would report a wider-than-expected loss for the second quarter.

* In more fallout from the Bre-X Minerals debacle, the Canadian mining company was delisted by the Toronto Stock Exchange and suspended by the Montreal and Alberta exchanges.