Dow falls on bleak news for world economy

NEW YORK -- A bleak forecast for the world economy pushed stocks to their biggest loss in two months.

Major stock indexes tumbled by more than 2 percent Monday, sending the Dow Jones industrial average down 201 points, after the World Bank estimated the global economy will shrink 2.9 percent in 2009. It previously predicted a 1.7 percent contraction.

The assessment was the latest bad news for the market since last month and further eroded hope the economy was starting to emerge from recession. Investors began driving stocks sharply higher in early trading, encouraged by modest improvements in housing, manufacturing and even unemployment.

The dampened economic outlook from the World Bank, a global lender based in Washington, D.C., also weighed on the prices of oil, metals, and other commodities. Those price drops in turn sent energy and metal producers' shares falling.

The stock market is coming off its first weekly loss in more than a month after mixed economic readings last week.

Investors have gone from enjoying a string of better-than-expected economic data to trying to manage a list of worries about the economy. Stocks have lost ground several times in the last month on fears that rising interest rates and inflation would upend an economic recovery.

Many analysts also say the relief that erupted in early March about the economy led to outsize expectations for how quickly a recovery could occur. Other economic news has hit stocks since May. A disappointing government report last month on retail sales suggested the economy remained fragile, and the Federal Reserve reined in its expectations for how the economy will fare this year.

There were no major economic reports Monday, but traders will get data this week on new and existing home sales, durable goods orders, gross domestic product and personal incomes and spending.

The Federal Reserve also will be in the spotlight after its two-day meeting on monetary policy ends Wednesday. The central bank is widely expected to hold its key funds rate steady near zero, but investors want to know whether policymakers will say the economy is recovering or still in need of aid.

The Dow fell 200.72, or 2.4 percent, to 8,339.01, its lowest finish since May 27. It was the biggest drop for the blue chips since losing 290 points, or 3.6 percent, on April 20 as investors worried about the soundness of bank balance sheets.

The Dow has fallen for five of the last six days and remains down for June.

The Standard & Poor's 500 index fell 28.19, or 3.1 percent, to 893.04, also leaving the index with its biggest slide since April 20 and erasing its advance for the year. The Nasdaq composite index fell 61.28, or 3.4 percent, to 1,766.19.

After Monday's drop and a 3 percent slide last week, the Dow is down 5 percent for the year. The Nasdaq, however, remains up by 12 percent in 2009.

The market is selling off on the uncertainty of what lies ahead, said David Kotok, chairman and chief investment officer of Cumberland Advisors.

"The picture's not clear. You've got a market that's acting just that way," Kotok said.

Bond prices jumped Monday, pushing yields down, as the drop in stocks drove demand for the safety of government debt. The yield on the benchmark 10-year Treasury note sank to 3.69 percent from 3.78 percent late Friday.

The Fed has been buying Treasurys and other kinds of debt with the hope of keeping borrowing rates low at the same time the government has been issuing record amounts of debt. The Treasury Department is planning to auction another $104 billion in debt this week.

A gauge of stock market volatility known as Wall Street's "fear index" spiked. The VIX rose more than 11 percent Monday, its biggest one-day gain since April.

Benchmark crude for August delivery fell $2.52 to settle at $67.50 a barrel on the New York Mercantile Exchange. Gold prices also slid.

Shares of companies that produce commodities dropped. Oil company Chevron Corp. fell $2.30, or 3.4 percent, to $65.76, while aluminum producer Alcoa Inc. fell 98 cents, or 8.9 percent, to $10.02.

Few areas were spared the selling Monday, but investors moved toward industries like consumer staples and utilities that are expected to offer shelter in a tough economy. Procter & Gamble, the maker of Tide detergent and Crest toothpaste, slipped 8 cents to $50.56. Duke Energy Corp. rose 24 cents, or 1.7 percent, to $14.65.

The dollar was mostly higher against other major currencies.

The Russell 2000 index of smaller companies fell 19.91, or 3.9 percent, to 492.81.

About eight stocks fell for every stock that rose on the New York Stock Exchange, where consolidated volume came to 5.1 billion shares, down from 5.5 billion Friday. Trading was heavy Friday because of expiration of options and futures contracts.

Overseas, Japan's Nikkei stock average rose 0.4 percent. Britain's FTSE 100 fell 2.6 percent, Germany's DAX index fell 3 percent, and France's CAC-40 fell 3 percent.