Stocks knocked back

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NEW YORK (CNNMoney.com) -- Stocks tanked Monday, building on the previous week's declines, as investors continued to worry about the economic outlook amid rising inflationary pressures and slower growth prospects.

The Dow Jones industrial average (INDU) lost 1.3 percent. The broader S&P 500 (INX) index lost around 1.5 percent. The tech-fueled Nasdaq (COMPX) composite lost 2.3 percent.

Treasury prices rose, lowering the corresponding yields as investors sought safety in government debt. The dollar was mixed versus other major currencies. Oil prices slipped and gold prices rose.

Stocks tumbled Friday at the end of a tough week, after a report showing higher consumer inflation raised bets that the Federal Reserve won't be able to keep cutting interest rates, even as the economy continues to struggle.

Those worries remained in place Monday, as investors sorted through the day's economic news and mulled the Fed's first credit auction.

"We're just in that rut right now, where people are worrying about credit and buyers are waiting for a bottom," said Ron Kiddoo, chief investment officer at Cozad Asset Management.

He said that stocks are likely to remain in a funk through the Christmas holidays.

On the upside, "sentiment has grown so negative that the market will likely react well to any good news that comes out over the next few weeks," said James Shelton, chief investment officer at Kanaly Trust Company.

Tuesday brings the November reports on housing starts and building permits, both expected to show declines.

The Federal Reserve offered $20 billion in 28-day credit through an auction Monday. The goal is for commercial banks to borrow from the Fed and then boost their lending to businesses and consumers. Results will be released Wednesday.

The series of auctions are part of the central bank's ongoing efforts to loosen up tight credit markets. Last week, the central bank also cut interest rates for the third time in a row since September as a means of adding liquidity to the banking system and tempering the risks to an economic recession.

But investors are worried that the Fed may have to put the brakes on its rate-cutting campaign, particularly if inflationary pressures keep rising. Former Fed Chairman Alan Greenspan said Sunday that the economy was at growing risk for stagflation - an environment in which the economy must contend with rising inflation and slower growth.

Meanwhile, Monday's economic news was mixed.

The New York Empire State index fell to 10.3 in December from 27.4 in November, a steeper-than-expected decline in the regional manufacturing read.

A separate report showed that the third-quarter current-account deficit narrowed more than expected.

And an afternoon report showed that homebuilder sentiment in December remained at a record low for the third straight month.

The day also brought a number of corporate mergers, although the news failed to move the broader market higher.

Ingersoll-Rand (IR) said it will buy Trane (TT) for $10.1 billion, in a deal that will create one of the largest air conditioner manufacturers in the world. Ingersoll-Rand shares fell 11 percent, while Trane shares jumped nearly 22 percent.

Aon (AOC, Fortune 500) said it will sell two insurance units for $2.75 billion in separate all-cash deals. Aon shares gained 1 percent.

Loews (LTR, Fortune 500) said its board has approved a spinoff of cigarette marker Lorillard Inc. Loews shares gained over 2 percent.

National Oilwell Varco (NOV, Fortune 500) said it will buy oil drilling gear maker Grant Prideco (GRP) for $7.37 billion in cash and stock. National Oilwell shares fell 8.6 percent and Grant Prideco shares rose 13.6 percent.

Stock declines were broad-based, with 27 out of 30 Dow issues falling, led by Alcoa (AA, Fortune 500), Hewlett-Packard (HPQ, Fortune 500), Home Depot (HD, Fortune 500), Intel (INTC, Fortune 500) and Verizon (VZ, Fortune 500).

Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than four to one on volume of 1.44 billion shares. On the Nasdaq, decliners topped advancers by more than four to one on volume of 1.50 billion shares.

Treasury prices rose as investors sought safety in government debt, lowering the yield on the 10-year note to 4.14 percent from 4.24 percent late Thursday. Treasury prices and yields move in opposite directions.

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

U.S. light crude oil for January delivery fell 64 cents to settle at $90.63 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery rose $1.30 to settle at $799.30 an ounce.