NEW YORK (CNNfn) - Wall Street suffered a sharp setback Monday, as investors, spooked by the prospect of rising interest rates, rushed to sell a broad array of stocks.
Rising bond yields and steep declines in overseas markets added to the pressure Analysts called the it the beginning of an expected market correction.
Ralph Acampora, chief technical analyst at Prudential Securities, and a respected Wall Street bull, said he expects the stock market to pull back 5 to 10 percent starting immediately. But he was quick to add that the longer-term trend is still bullish and he still sees the Dow industrials reaching 10,000 by the end of this year.
"Again, my definition of correction here is short term and this correction is in the context of a long-term bullishness," Acampora was quoted as telling investors.
The Dow Jones industrial average plummeted 146.98 points, or 1.62 percent, to close at 8,917.64. At one point during the day, the Dow had been down about 224 points. On the New York Stock Exchange, declining issues smothered advances 2,890 to 313 as 693 million shares were traded.
Other markets followed suit, with the Nasdaq Composite losing 48.65, or 2.60 percent, to 1,820.31, its third-largest one-day point loss. The S&P 500 index slipped 21.36, or 1.93 percent, to 1,086.54. (Look here for the performance of widely held stocks.)
The sell-off was triggered by sharp declines in bonds, which came on the heels of a Wall Street Journal article that said the U.S. Federal Reserve has dropped its neutral monetary policy stance and is now leaning toward raising interest rates. The story caused a 1-21/32 points drop in the price of the bellwether 30-year Treasury bond, lifting its yield to 6.06 percent -- the highest in almost two months.
"What's happening is exactly what the Federal Reserve Board wanted to happen," said Robert Froehlich, chief investment strategist at Scudder Kemper Investments. "They wanted to change their bias from neutral to tightening to slow down the markets and that's exactly what's happening today: the stock market's overreacting to the news, as is the bond market."
Talk of higher interest rates initially helped the dollar against other currencies, but the sharply negative reaction stock and bond markets showed later weighed on the greenback.
Higher rates = cheaper stocks?
One of the Fed's concerns, according to the Journal article, is the stock market's relatively uninterrupted climb in recent months to levels never reached before. Sky-high stock prices, combined with soaring values of assets like real estate, could eventually lead to inflationary pressures -- something the Fed is eager to avert.
On the other hand, a stock market pullback would help slow down economic growth, lowering inflationary tensions.
"The Federal Reserve does not want to have to raise interest rates. The next best thing is to have the market do it for them and that's exactly what happened," Froehlich said. (330K WAV) or (330K AIFF)
Financial stocks were especially hard hit by the prospect of higher interest rates. Among the losers in the sector, Dow component J.P. Morgan (JPM) fell 3-7/8 to 131-3/4, and Chase Manhattan (CMB) shed 1-7/16 to 132-5/8.
Shares of American Express (AXP) turned lower and closed down 1/4 to 101-5/8. The stock had risen early in the day after the British newspaper Sunday Telegraph said the financial services conglomerate is in merger talks with insurance giant American International Group (AIG), Shares of AIG inched down 2-5/16 to 129-3/16. Both companies declined to comment on the story.
Stocks in other market sectors also suffered losses in what analysts labeled a long overdue pullback that hardly took anyone by surprise.
Technology issues dropped as well, with major stocks like Dow component IBM (IBM) losing 2 to 115-3/8. Microsoft (MSFT) finished off 1-11/16 to 90-5/16, Intel (INTC) fell 2-1/16 to 80, and Dell (DELL) tumbled 2 to 74-5/16.
Airlines joined the slide, with AMR (AMR), parent of American Airlines, shedding 5-5/16 to 146-3/4, Delta Air Lines (DAL) losing 4-11/16 to 112-11/16, and UAL (UAL), the parent of United Airlines, off 2-5/16 to 87-5/16. The Dow Transports index slid 109.35 to 3,448.67, its third-largest one-day point decline.
Finally, moving against the market, shares of Fluke Corp. (FLK) surged 7-3/16, or 31 percent, to 30-3/8, helped by news that Danaher Corp. (DHR) will buy the maker of electronic testing tools for $625 million. Fluke's stock topped the list of net gainers on the NYSE.
And shares of Cincinnati Bell (CSN) jumped 2-7/8 to 36-13/16 on news the local phone service provider was spinning off its billing and customer services units. 
--by staff writer Malina Poshtova Zang
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