Economic woes rattle Wall Street

NEW YORK (CNNMoney.com) -- Stocks tumbled Thursday afternoon on worries about the economy, sparked by a jump in wholesale prices and the latest problems for the financial sector.

On the upside, a strong reading on retail sales cooled some worries about consumer spending.

The Dow Jones industrial average (INDU) lost 0.7 percent with under 2-1/2 hours left in the session, while the broader S&P 500 (SPX.X) index fell 1 percent. The tech-fueled Nasdaq (COMPX) composite also dipped 1 percent.

Stocks have been volatile this week - and all fall - as investors have sorted through the ongoing problems in the housing and credit markets amid worries about a possible recession.

In particular, the developments in the credit markets have left investors scratching their heads.

"We're seeing enormous fluctuations here, because this is a new type of problem and people don't really understand how it works or how long it's going to go on," said Robert Loest, portfolio manager at Integrity Funds.

"We're going to get a resolution, but no one knows when and that's part of the stock market's problem right now," he added.

News from the Fed this week provided some reassurance, but concerns remain front and center.

On Wednesday, the Federal Reserve announced a plan to team up with other central banks to help banks borrow money more easily, a plan investors continued to mull Thursday.

Earlier this week, the Federal Reserve cut a key short-term interest rate by a quarter-percentage point, saying that the economic outlook was worsening. The bankers also alluded to still-present inflationary pressures.

Questions of inflationary pressures were raised again by Thursday's economic news, including reads on producer prices and retail sales.

The Producer Price Index (PPI) jumped 3.2 percent in November, due in large part to a spike in energy prices, the government reported. PPI was well above forecasts and followed a rise of 0.1 percent in October. So-called "core" PPI, which excludes food and energy prices, also rose more than expected. (Full story).

A separate report showed a stronger-than-expected jump in November retail sales and in sales excluding autos.

Another report showed a bigger drop in weekly jobless claims than economists were expecting. Meanwhile, business inventories rose 0.1 percent in October, shy of forecasts.

In corporate news, Lehman Brothers (LEH, Fortune 500) reported a decline in quarterly profit that nonetheless topped estimates. Shares fell 2.5 percent. Other major banks declined too, including Merrill Lynch (MER, Fortune 500), Morgan Stanley (MS, Fortune 500), JP Morgan Chase (JPM, Fortune 500) and Citigroup (C, Fortune 500).

Washington Mutual (WM, Fortune 500) tumbled after Banc of America Securities downgraded it to "sell" from "hold," Briefing.com reported.

Fellow mortgage lender Countrywide Financial (CFC, Fortune 500) slipped as well.

JetBlue Airways (JBLU) surged 15 percent in afternoon trade on reports that Lufthansa is in talks to buy a stake of nearly 25 percent in the discount air carrier, the New York Times reported.

Shares of Biogen Idec (BIIB) lost 26 percent after the company said it had failed to find a buyer and would remain independent.

Biotech Savient Pharmaceuticals (SVNT) jumped 18 percent in active Nasdaq trade after its gout drug candidate showed positive results in a late-stage trial.

Another biotech, Rigel Pharmaceuticals (RIGL), also gained on positive study results, for a rheumatoid arthritis drug candidate . The company's stock surged 130 percent in afternoon trading.

In corporate deal news, Dow Chemical (DOW, Fortune 500) said it will sell a 50 percent stake in five of its businesses to a Kuwaiti company for $9.5 billion. Shares jumped 7 percent in active trading.

A variety of oil and gold stocks fell in tandem with the prices of the raw commodities. The Amex Gold Bugs (HUI) index lost over 3.5 percent.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than four to one on volume of 810 million shares. On the Nasdaq, decliners topped advancers by more than two to one on volume of 1.32 billion shares.

Treasury prices slipped, raising the yield on the 10-year note to 4.16 percent from 4.09 percent late Wednesday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar rose versus the euro and was lower against the yen.

U.S. light crude oil for January delivery fell $2.11 to $92.28 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery fell $15.80 to $803 an ounce.