NEW YORK -- Concern that inflation and interest rates will rise, combined with a profit warning from Woolworth Corp., sent U.S. stocks lower.
Stocks nose-dived for most of the day, as an index of commodity prices rose to its highest level since November 1990, before staging a late rally.
Germany's move to leave interest rates unchanged contributed to the drop by driving down major European markets in an action seen as delaying Europe's recovery.
The Dow Jones Industrial Average dropped as much as 27.01 before settling at 3,967.66, down 7.88. Losses in AlliedSignal Inc., Woolworth and Aluminum Co. of America offset gains in General Motors Corp. and General Electric Co.
The S&P; 500 Index average fell 1.3, to 480.7, after setting a record 482 Wednesday. Semiconductor, telephone, bank, oil and insurance stocks were among the weakest issues.
The Nasdaq Combined Composite Index dropped 1.79, to 797.97, after falling as much as 4.73. Intel Corp., down $2, to $63.25, led the decline after the semiconductor maker said it will dismiss some patent claims against rival Cyrix Corp.
To ensure U.S. inflation stays low, "short-term rates are probably going to come up a little," said John Brooks, director of sales and marketing at Notley Group in Atlanta. "I think they're in the process of doing that now. What you're seeing is a normal increase in rates as the economy gets stronger."
Woolworth, down $1.25, at $24.625, accounted for much of the Dow's loss. The retailer said fourth-quarter earnings will fall "well below" last year's net income of $1.26 a share.
With the Dow Jones industrial average "bumping up against the 4,000 mark," and the price/earnings ratio on the Dow at about 31 times earnings, "that probably gives people a good reason to pause," said Jim Benning, trader at BT Brokerage.
Almost 10 stocks dropped for every seven that rose on the New York Stock Exchange, where total volume fell to 318 million shares, from 328.8 million Wednesday.
Stocks slumped after the Commerce Department said factory orders in December rose 1.2 percent, below economists' forecast of a 1.4 percent rise, but still the fifth consecutive monthly rise.
On the other hand, an unexpectedly large increase in the number of people filing new unemployment claims last week means "the economy is not growing as fast in the first quarter as in the fourth," said Philip Orlando, equity portfolio manager at First Capital Advisers, who manages $100 million in assets. "The Fed hasn't any reason to raise rates."
Other investors were concerned about the fourth successive jump in the Commodity Research Bureau's index of 21 commodities. The index rose 0.74, to 228.73.
Gold futures contracts, often used as a hedge against inflation, rose $2.60, to $389.10.
The commodity increases helped fuel concern in the bond market that the Fed is close to raising short-term interest rates.
Long-term interest rates, as reflected in 30-year bond yields, rose to 6.31 percent, from 6.28 percent Wednesday.
Higher interest rates make stocks less attractive than fixed-income investments and raise companies' financing costs.