NEW YORK (CNNMoney.com) - Stocks tumbled Thursday, as worries about higher inflation and slower earnings growth in 2006 gave investors a reason to bail out after a strong January.

The Dow Jones industrial average (down 101.97 to 10,851.98, Charts) and the broader Standard & Poor's 500 index (down 11.62 to 1,270.84, Charts) both lost about 0.9 percent.

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The tech-fueled Nasdaq composite (down 28.99 to 2,281.57, Charts) and the Russell 2000 (down 9.23 to 726.25, Charts), which measures small caps, both skidded almost 1.3 percent.

Treasury prices were little changed, while the dollar was mixed versus other major currencies. Oil sank back below $65 a barrel in New York.

Stocks were in the red throughout most of the session, after a morning report showed a surprise fall in business productivity and a rise in labor costs. The combined effect was to spark fears about higher inflation and interest rates in the months ahead.

A spate of discouraging quarterly earnings and forecasts added to the pressure.

Investors are also anxiously awaiting the January employment report, due out Friday morning.

"We're going to look at the most important piece of economic data, the payroll report" said Art Hogan, chief market strategist at Jefferies & Co.

Employers are expected to have added 250,000 jobs to their payrolls in January, after adding 108,000 in December, according to economists surveyed by Briefing.com.

The unemployment rate, generated by a separate survey, is expected to hold steady at 4.9 percent, unchanged from December.

Reports are also due on consumer sentiment, factory orders and the services sector of the economy.

It was the morning's business productivity report that appeared to spark the selloff, said Paul Rabbit, president at Rabbit Capital Management.

"The stock market has rationalized less-than-exciting job growth by saying that U.S. productivity is so strong that we can get more output per manpower worked," Rabbit said. "But if productivity is truly slowing, the fear is that would push up labor costs, increase inflation, and impact interest rates."

Meanwhile, the market's strong showing in January may have left stocks overbought on a technical basis, especially small- and mid-cap issues, he added. The Dow 30 gained 1.4 percent in January, the S&P 500 gained 2.5 percent and the Nasdaq composite jumped 4.6 percent.

Business productivity fell at a 0.6 percent rate in the fourth quarter, the government reported Thursday morning -- the first decline in nearly five years and a bigger slowdown than economists had expected. At the same time labor costs zoomed, all of which may have sparked new concerns about inflation.

In addition to productivity, a separate government report showed a surprise drop in weekly jobless claims from the previous week.

GM (down $0.90 to $23.60, Research) was the Dow's biggest loser, down 3.7 percent, after UBS downgraded the automaker to "reduce" from "neutral."

Blue-chip declines were broad, with 26 out of 30 Dow industrials closing lower. Merck (down $0.84 to $33.82, Research), Honeywell (down $0.81 to $38.53, Research) and Altria (down $1.47 to $72.03, Research) all lost at least two percent.

The tech sector got pummeled, with chip and Web stocks hit particularly hard.

Intel (down $0.35 to $21.20, Research), Altera (down $0.73 to $19.40, Research) and Teradyne (down $0.86 to $17.00, Research) dragged on the Philadelphia Semiconductor (down 8.19 to 536.49, Charts) index, or the SOX.

eBay (down $1.28 to $41.58, Research) and Yahoo! (down $0.75 to $34.25, Research) led the list of Web stocks dragging on the Goldman Sachs Internet (Charts) index.

Comcast (down $0.97 to $27.02, Research) gave back 3.5 percent after the cable TV operator said fourth-quarter profit fell 69 percent and offered a disappointing outlook for 2006 growth.

Tyco International (down $1.30 to $24.80, Research) lost 5 percent and topped the New York Stock Exchange's most-actives list after the company reported lower first-quarter profit and forecast current-quarter earrings in a range that is below analysts' forecasts.

On the upside, Starbucks (up $3.04 to $34.40, Research) soared almost 10 percent after the specialty coffee retailer reported first-quarter earnings that rose from a year earlier and beat forecasts.

Additionally, investors took in mostly upbeat January sales reports from the nation's retailers.

Market breadth was negative and volume was robust. On the New York Stock Exchange, losers topped winners by twelve to five on volume of 1.90 billion shares. On the Nasdaq, decliners beat advancers by more than two to one on volume of 2.29 billion shares.

Oil prices slumped, despite ongoing worries about Iran's nuclear program and what impact it may have on that country's oil exports.

U.S. light crude oil for March delivery fell $1.88 to settle at $64.68 per barrel on the New York Mercantile Exchange.

Investors also cashed out of oil stocks, sending the Amex Oil (down 20.53 to 1,095.07, Charts) index down by 1.8 percent.

Treasury prices were little changed, leaving the 10-year note yield at about 4.56 percent. Treasury prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and gained against the yen.

COMEX gold for April delivery rose $3.40 to settle at $572.80 an ounce.

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