By Ellis Mnyandu
Data pointing to the slowest start rate in home building in more than 17 years highlighted the deterioration in housing.
Fanning gloom about the financial sector was a forecast by JPMorgan Securities that investment bank Lehman Brothers
Lehman shares fell more than 4 percent as the S&P financial index <.GSPF> declined 1.4 percent.
The government's Producer Price Index shot up at the fastest annual rate in 27 years, while core producer prices, excluding volatile food and energy, notched their fastest rise since November 2006. Investors feared the specter of inflation could hinder the Federal Reserve's efforts to spur growth by keeping interest rates low.
"The Fed is stuck between a rock and a hard place, and it shows," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco. "The market is struggling a bit."
The Dow Jones industrial average <.DJI> fell 122.94 points, or 1.07 percent, to 11,356.45. The Standard & Poor's 500 Index <.SPX> slid 11.18 points, or 0.87 percent, to 1,267.42. The Nasdaq Composite Index <.IXIC> declined 23.41 points, or 0.97 percent, to 2,393.57.
Shares of Bank of America
"We are back to struggling again in the financial sector particularly," said William Stone, chief investment strategist at PNC Financial in Philadelphia. "Underneath some of that is just concern about the overall global economic slowdown."
If interest rates were to rise, that would increase borrowing costs for businesses and consumers and exacerbate the impact of the housing slump.
Lehman shares fell to $14.30 on the New York Stock Exchange, where shares of Bank of America, the No. 2 U.S. bank, declined to $28.09. Shares of credit card and travel services company American Express dropped to $36.81.
Shares of American International Group Inc
Shares of home builders also slid following the Commerce Department's bleak report on housing starts.
Shares of Pulte Homes
On Nasdaq, shares of Staples Inc
The PPI data supported those arguing that the U.S. economy is dogged by mounting inflationary pressures even as growth slows due to the housing downturn. July's Consumer Price Index last week rose at the fastest pace in 17 years.
(Additional reporting by Herb Lash; Editing by Kenneth Barry)