NEW YORK (CNNMoney.com) - Inflation jitters and nervousness over interest rates dragged blue chips lower for the third straight session Tuesday, leaving the Dow Jones industrial average battered and barely above 11,000.

The 30-share Dow (down 46.58 to 11,002.14, Charts), the world's most widely watched stock market gauge, spent most of the session below the 11,000 milestone as investors braced for what they now assume will be another rate hike by the Federal Reserve later this month.

Fed in focus: Jobs report leaves Fed with a task Weaker-than-expected payroll number, coupled with slow wage increase, could allow central bank to pause rate hikes in June. (more) Yields throw the Fed a curve 10-year Treasury yield slips below fed funds rate for first time since last recession, sparking debate about economy, Fed rate policy. (more) No thanks to the Fed Everyone's been waiting to see what the central bank will do next. The minutes from the last meeting aren't much help. (more)

The Standard & Poor's 500 index (down 1.44 to 1,263.85, Charts) and the Nasdaq composite (down 6.84 to 2,162.78, Charts) posted modest losses. Elsewhere, the dollar rose along with bond prices, while oil edged lower.

The Dow has now tumbled nearly 650 points, or 5.5 percent, since coming about 80 points shy of its all-time high on May 10, as concerns about inflation, the outlook for rates, and the stewardship of new Fed Chairman Ben Bernanke have all made financial markets nervous.

With no economic reports on tap Tuesday, investors focused on comments from a number of Fed officials, who talked tough on inflation a day after Bernanke made similar comments to a bankers' conference in Washington.

The effect was clear: investors now believe there's a much greater chance the Fed will raise its short-term rate target for a 17th straight time when the central bank's policy-makers meet on June 28-29.

Rate futures on the Chicago Board of Trade show investors are now betting on an 80 percent chance of a June rate hike, up from 42 percent late Friday.

"The market is bracing for another rate hike. But more than that, there's the fear the rate hiking cycle won't end in June," said Eugene Peroni, senior managing director at Claymore Advisors.

Investors can expect that more of the same in the weeks ahead, according to Ralph Acampora, technical analyst at Knight Capital Group. "We don't think this is the end of the market's jitteriness. We expect more downside," he said.

On Wednesday, investors will take in a reading on April wholesale inventories and the weekly jobless claims report. As of 5:40 p.m. ET, Nasdaq and S&P futures pointed to a higher opening for stocks Wednesday.

The latest round of Fed speak echoed warnings Bernanke made Monday about inflation running uncomfortably high even as the economy starts to slow. (Full comments.)

Fed Governor Susan Bies said Tuesday that given the recent high readings on inflation and expectations for slower economic growth ahead, the central bank can't say when it will be finished raising rates. (Full story.)

St. Louis Federal Reserve President William Poole said in an interview published in the Wall Street Journal Tuesday that a slowing economy may not reduce inflation. (Full story.)

Bernanke's statements stoked fears that rates are headed higher and sent the Dow skidding to its third-biggest point and percentage loss of the year Monday. The Nasdaq and S&P 500 turned in their second-worst performances for 2006.

Uncertainty surrounding rates has pressured stocks since May 10, the day of the last Fed meeting, when the central bank policy-makers offered no clear sign of what investors can expect in coming months.

Investors are also still getting acquainted with Bernanke, who took the helm at the central bank from Alan Greenspan on Feb. 1.

The new Fed chief was perceived to be more dovish on inflation when he took over, but his hawkish turn has taken some in the market by surprise, Claymore Advisors' Peroni said.

Higher rates hurt stocks since they weigh on corporate earnings and make other investments, like cash, more attractive.

"The market has been hanging on every utterance from a Fed official about the likely course of events on June 29," said Ken Mayland, president of ClearView Economics, a firm specializing in economic research and forecasting.

Among Dow stocks, 18 fell and 12 rose. Economically sensitive issues like Alcoa (down $0.69 to $30.69, Research), Boeing (down $1.48 to $80.65, Research) and United Technologies (down $1.40 to $60.05, Research) led the declines.

Elsewhere, shares of consumer companies less dependent on swings in the economy benefited as investors turned more defensive. Winners included Pepsi (up $0.77 to $60.52, Research) and Johnson & Johnson (Research), both up about 1.3 percent, and Colgate-Palmolive (up $0.62 to $60.21, Research), which rose 1 percent.

Stocks in the rate-sensitive housing sector remained under pressure. The Dow Jones U.S. Home Construction index sank 3.9 percent after tumbling 5 percent Monday.

Hewlett-Packard (down $0.69 to $30.90, Research) revised its second-quarter profit higher and bumped up its earnings outlook for the full fiscal year, but shares still fell.

Shares of embattled automaker General Motors (down $0.80 to $25.25, Research) lost 3 percent after CEO Rick Wagoner told shareholders that the company would have problems hitting its target to cut costs by $1 billion this year.

In corporate news, IBM (up $0.70 to $79.76, Research) said it plans to invest nearly $6 billion in India over three years. Shares rose nearly 1 percent.

Market breadth was negative. On the New York Stock Exchange, decliners topped advancers by a margin of two to one on volume of 1.88 billion shares. On the Nasdaq, losers beat winners by a margin of three to two as 2.11 billion shares changed hands.

Oil prices edged lower, stemming two straight days of gains that contributed to investor skittishness about inflation Monday.

U.S. light crude oil for July delivery fell 10 cents to settle at $72.50 a barrel on the New York Mercantile Exchange. The front-month contract had tumbled as low as $71.35 a barrel after Iran said proposals made by world powers to end a standoff over its nuclear program had positive points.

Treasury prices rose, lowering the yield on the benchmark 10-year note to 5 percent from 5.02 percent late Monday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar rose against the euro and soared to a one-month high versus the yen on expectations for another rate raise from the Fed.

COMEX gold for August delivery tumbled $13.70 to settle at $635 an ounce.

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