June 6 (Bloomberg) -- Inflation concerns sent U.S. stocks to their biggest two-day decline since March after first-quarter labor costs rose more than forecast.

Exxon Mobil Corp., Cisco Systems Inc. and Pfizer Inc. led declines among all 10 industry groups in the Standard & Poor's 500 Index. International Business Machines Corp., the world's biggest computer-services company, had the steepest drop in the Dow Jones Industrial AverageI4WF8SHVPHZK"></a> three times faster than the government's previous estimate last quarter, increasing the odds companies will push up prices. Federal Reserve Bank of Cleveland President Sandra Pianalto today also joined Fed Chairman Ben S. Bernanke in warning that prices are rising too quickly. European stocks posted their biggest decline in more than two months on concern policy makers will keep raising interest rates to rein in inflation.

``Inflation causes reduced consumer spending, it squeezes profit margins,'' said John Kornitzer, who manages $6 billion at Kornitzer Capital Management in Shawnee Mission, Kansas. ``The market has been making new highs. It can't go up forever.''

The S&P 500 lost 13.57, or 0.9 percent, to 1517.38. The Dow average fell 129.79, or 1 percent, to 13,465.67. The Nasdaq Composite Index retreated 24.05, or 0.9 percent, to 2587.18.

Stocks yesterday posted their first decline in a week after bond yields surged and Bernanke said core inflation ``remains somewhat elevated.'' The yield on the two-year Treasury note decreased 5 basis points, or 0.05 percentage point, to 4.95 percent today.

The S&P 500's decline of 1.4 percent and the Dow average's 1.5 percent retreat over the past two days are the largest drops since March 13.

Labor Costs

The government's measure of labor costs rose 1.8 percent last quarter, triple the rate initially estimated and higher than the 1.3 percent economists had expected in a Bloomberg News survey.

Productivity, a measure of how much an employee produces for each hour of work, rose at an annual rate of 1 percent, down from the 1.7 percent pace reported last month, revised Labor Department figures showed.

Pianalto, speaking to a conference in Frankfurt, said inflation has been higher than she's comfortable with and identified rising energy and commodity prices as possible threats.

For three years, the Fed's preferred inflation measure has been near the top of or above a 1 percent to 2 percent range preferred by policy makers. The core personal consumption expenditures price index, which excludes food and energy, rose 2 percent in the 12 months to April.

Bond Yields

Better-than-expected growth in service industries last month sent the two-year Treasury note yield to 5 percent yesterday for the first time since August.

Traders who a month ago were convinced the Fed would lower its target for the overnight lending rate between banks at least once by October now see a 10 percent chance of that happening, futures trading shows. The central bank has repeatedly emphasized the risks of inflation.

``I am very concerned about inflation, with respect to how it would affect the market,'' said Joseph Ranieri, a trader at Canaccord Adams Inc. in Boston. ``I would be cautious.''

Almost six stocks fell for every one that gained on the New York Stock Exchange. Some 1.5 billion shares changed hands, 1.2 percent less than the three-month average.

Exxon, the world's largest oil producer, lost 64 cents to $83.62. IBM slipped $3.43, or 3.2 percent, to $102.41. Cisco, the top producer of computer-networking equipment, retreated 60 cents to $26.60.

Pfizer, Railroads

Pfizer Inc. declined 49 cents to $26.79 after a U.S. Supreme Court justice rejected the drugmaker's bid to force two rival companies to stop selling generic versions of Norvasc, the blood pressure drug that a year ago generated $13 million a day in sales.

Railroad shares dropped after UBS AG said Union Pacific Corp. and Burlington Northern Santa Fe Corp. may cut their earnings forecasts as U.S. shipping volumes shrink. Union Pacific fell $2.82 to $118.16 and Burlington Northern dropped $2.41 to $90.49.

Whole Foods Market Inc. fell for a second day on concern the largest U.S. natural-foods grocer's purchase of rival Wild Oats Markets Inc. will be derailed. U.S. antitrust regulators said yesterday they plan to file a suit to block the takeover because the combined company would control too much of the U.S. natural- foods market and raise prices.

Ripple Effects

The agency's action could have ripple effects throughout the retail industry, analysts said. Shares of Borders Group Inc. and OfficeMax Inc. fell today on concern any potential merger with a larger competitor may be blocked by regulators.

Whole Foods shares dropped $1.23 to $39.25. Wild Oats slipped 29 cents to $16.87. Borders lost 99 cents to $20.79. OfficeMax declined 66 cents to $43.40.

All 16 homebuilders in S&P indexes retreated after the National Association of Realtors said U.S. home sales and price declines in 2007 are going to be steeper than earlier forecast.

D.R. Horton Inc., the biggest U.S. homebuilder by market value, fell 50 cents to $22.44. Lennar Corp., the second largest, lost 60 cents to $44.28.

Refiners dropped as the so-called crack spread, or profit margin earned for turning three barrels of crude oil into two barrels of gasoline and one of heating oil, fell 2.9 percent to $23.003 a barrel, based on New York futures prices.

Sunoco Inc., the largest oil refiner in the U.S. Northeast, declined $3.17, or 3.8 percent, to $80.20 for the second-biggest slide in the S&P 500. Valero Energy Corp., the country's largest refiner, retreated $1.76 to $74.26.

Panera Sinks

Panera Bread Co. plunged $8.04 to $50.28 after the bakery chain said second-quarter earnings will be 38 cents to 40 cents a share and sales at stores open at least 18 months will increase by 1.5 percent to 2.5 percent. Panera had forecast profit of as much as 51 cents a share and sales growth of up to 4.5 percent.

TD Ameritrade, Johnson Controls

TD Ameritrade Holding Corp. climbed 76 cents to $20.71. The hedge funds Jana Partners LLC and SAC Capital Advisors LLC, which own about 8.4 percent of TD Ameritrade, said the company should look into merging with E*Trade Financial Corp. or Charles Schwab Corp., saying that would ``dramatically increase long-term shareholder value.''

Johnson Controls Inc. rallied $4.31 to $112.76. Credit Suisse raised its rating on the shares to ``outperform'' from ``neutral'' because of a ``robust'' outlook for the company's building services division.

The Russell 2000 Index, a benchmark for companies with a median market value of $664 million, dropped 0.8 percent to 841.21. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, lost 0.9 percent to 15,343.15. Based on its decline, the value of stocks decreased by $176.4 billion.

Europe's Dow Jones Stoxx 600 Index fell the most since March 14 after European Central Bank President Jean-Claude Trichet said interest rates in the 13 nations that use the euro are still low enough to support economic growth, suggesting the bank sees room to raise rates again after lifting the benchmark refinancing rate a quarter percentage point to 4 percent today.

Borders Group Inc. (BGP US)
Burlington Northern Santa Fe Corp. (BNI US)
Cisco Systems Inc. (CSCO US)
D.R. Horton Inc. (DHI US)
Exxon Mobil Corp. (XOM US)
International Business Machines Corp. (IBM US)
Johnson Controls Inc. (JCI US)
Lennar Corp. (LEN US)
Panera Bread Co. (PNRA US)
Pfizer Inc. (PFE US)
Sunoco Inc. (SUN US)
TD Ameritrade Holding Corp. (AMTD US)
Union Pacific Corp. (UNP US)
Valero Energy Corp. (VLO US)
Whole Foods Market Inc. (WFMI US)
Wild Oats Markets Inc. (OATS US)

To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net.

Last Updated: June 6, 2007 17:05 EDT