June 6 (Bloomberg) -- The Dow Jones Industrial Average fell the most in 15 months, the dollar slid to a one-week low and Treasuries rallied after unemployment and fuel prices surged, heightening speculation the U.S. faces a protracted recession.

U.S. equities declined, led by a 395-point drop in the Dow, as crude jumped more than $10 a barrel. The Standard & Poor's 500 Index decreased 3.1, the steepest sell-off in three months, and Europe's Dow Jones Stoxx 600 slid 2 percent to the lowest since April 15.

The dollar lost 0.9 percent against a basket of six currencies including the euro, against which it weakened 1.1 percent to $1.5775, as investors pared bets the U.S. Federal Reserve will raise interest rates this year. Yields on 10-year U.S. Treasury securities and European government bonds declined as the price of fixed-rate investments climbed.

``The markets are discounting weaker-than-expected global growth,'' said Joseph Quinlan, the New York-based chief market strategist for the global wealth and investment management division of Bank of America Corp., which oversees $607 billion. Higher unemployment and rising energy and food prices ``will mean a significant global slowdown in personal consumption.''

General Electric Co. helped lead the retreat in U.S. stocks after the Labor Department said the jobless rate increased to 5.5 percent in May, the highest since October 2004, from 5 percent in April. The median estimate in a Bloomberg survey was 5.1 percent, and no forecast was higher than 5.2 percent. GE fell 3.4 percent to $30.02, the steepest retreat in almost two months.

Payrolls

American International Group, the world's largest insurer, plunged 6.8 percent after regulators said they were examining its accounting. American Express Co., Citigroup Inc. and Boeing Co. each lost more than 5 percent.

Payrolls shrank for a fifth month, the Labor Deparment said. The loss of 49,000 jobs was narrower than estimated.

Crude oil for July delivery climbed $10.75 a barrel to settle at $138.54 a barrel on the New York Mercantile Exchange. Crude touched a record $139.12 as commodities denominated in the U.S. dollar reflected its diminished value and Morgan Stanley predicted the price will reach $150 within a month. The second- biggest U.S. securities firm based the forecast on shipping patterns showing Asia is getting record volumes of oil from the Middle East.

Oil also rose after Shaul Mofaz, Israel's transportation minister and a contender for the post of prime minister, told the Yediot Ahronot daily that Israel will have to attack Iran, the world's fourth biggest oil producer, if it doesn't abandon its nuclear-development program. The commodity has more than doubled from over the past year.

Options Increase

U.S. stock options had their steepest increase since March 2007. The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 26 percent to 23.56. The benchmark gauge for U.S. equity options, which measures the cost of insurance against declines in the Standard & Poor's 500 Index, has gained 45 percent since falling to its lowest this year on May 15.

The S&P 500 had rebounded 10 percent through yesterday from a 19-month low in March as a better-than-forecast report on gross domestic product and a reduction of the Federal Reserve's benchmark lending rate to 2 percent spurred gains. Speculation the Fed is done cutting rates and concern about rising inflation have since helped wipe out $89.5 billion in market value.

Expansion Slows

The U.S. economy expanded at a rate of 0.6 percent in the fourth quarter and 0.9 percent in the first quarter, the first time in 17 years the growth rate has fallen short of 1 percent for two consecutive quarters. Consumers, whose spending accounts for about two-thirds of the economy, are cutting back as home values fall and fuel prices climb.

``Households continue to face significant headwinds, including falling house prices, a softer job market, tighter credit and higher energy prices,'' Federal Reserve Chairman Ben S. Bernanke said in a speech this week. The second quarter may be ``relatively weak.''

Oil yesterday advanced 4.5 percent to $127.79 a barrel. Today's gain eclipsed the price of a barrel of oil on Dec. 10, 1998, when crude traded at $10.72.

The 10-year U.S. Treasury note's yield declined 0.12 percentage point to 3.92 percent. Interest-rate futures prices indicated 26 percent odds the Federal Reserve will raise interest rates in September, down from 28 percent yesterday. The odds of no change climbed to 72 percent from 69 percent.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

Last Updated: June 6, 2008 16:34 EDT