NEW YORK (CNN/Money) - Wholesale prices posted the biggest drop on record last month, the government said Thursday, just nine days after the Federal Reserve cited worries about possible deflation in the world's largest economy.

Separately, industrial production fell, with U.S. factories running at their slowest pace in 20 years, and jobless claims also dropped, though the labor market remained weak.

The Labor Department said its producer price index (PPI), a measure of wholesale prices, fell 1.9 percent -- the biggest drop since the department began tracking the numbers -- after rising 1.5 percent in March.

The so-called core PPI, which excludes often volatile food and energy prices, fell 0.9 percent after rising 0.7 percent in March. Economists, on average, expected PPI to fall 0.6 percent and core PPI to fall 0.1 percent, according to Reuters.

Though the reports were worse than expected, some economists noted that they only concern the manufacturing sector, which makes up only about 15 percent of the total economy.

What's more, the drop in producer prices was driven mainly by a sharp drop in oil prices, following the U.S. war with Iraq, and also in automobile prices, as automakers offered new sales incentives in April.

"I don't remember the last time PPI told us anything useful about inflation in general," said Rory Robertson, an interest rate strategist with Macquarie Equities USA.

"Its month-to-month swings have been dominated by energy prices and automakers increasing and scaling back incentives. I don't think this particular report tells us anything new about the potential for deflation down the track."

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Still, the PPI report came after Fed policy-makers warned on May 6 of the risks of deflation, which is the opposite of inflation, in which prices fall uncontrollably, hurting corporate profits and leading to an economic slowdown.

On Wall Street, stocks rose but the gains were fading as the morning progressed, while Treasury bonds were mixed -- 30-year bonds rose in price while other issues fell.

Traders may have chosen to focus on the drop in jobless claims and a big jump in the New York Federal Reserve's index of manufacturer optimism as signs of an economic rebound -- or they might have seen the drop in PPI as a sign the Fed will soon take action to fight deflation.

Japan, the world's second-largest economy, has suffered from deflation for the better part of the past decade, with policy makers seemingly unable to stop the bleeding.

The Fed has indicated it was willing to take whatever steps necessary -- including cutting short-term rates or buying longer-term Treasury bonds -- to avoid deflation in the United States.

Much of the drop in headline PPI in April was due to a retreat in energy prices after the end of the U.S.-led war with Iraq -- this is the kind of deflation manufacturers welcome, since higher oil prices were cutting deeply into their profits.

Crude oil prices dropped 21.5 percent, natural gas prices fell 39.1 percent, and gasoline prices fell 22.3 percent. Other commodity prices -- including nonferrous metals, lumber and scrap steel -- also fell, but the drop in energy prices will be most helpful to the broadest range of producers.

Prices for passenger cars fell 2.6 percent after rising 3.3 percent. Light truck prices fell 4.6 percent after rising 5.2 percent. Unlike the consumer price index (CPI), the PPI includes the effects of automakers' financing incentives.

Off and on in the months since the terror attacks of Sept. 11, 2001, dealers have offered super-low and zero-percent financing to encourage sales of cars and trucks.

The Labor Department is scheduled to release its CPI report Friday. Economists, on average, expect the CPI to fall 0.1 percent after rising 0.3 percent in March.