Dec. 31 (Bloomberg) -- U.S. stocks ended the year with their worst weekly drop in almost three months as bond yields sparked concern about economic growth for 2006.

Yields for two-year Treasury notes rose above 10-year yields for the first time since 2000. The so-called inverted yield curve, which has preceded past economic recessions, helped cut the 2005 advance for the Standard & Poor's 500 Index to 3 percent and wiped out the Dow Jones Industrial Average's gain for the year.

``We're just limping into the new year,'' said Andy Brooks, head of equity trading at T. Rowe Price Group Inc. in Baltimore.

The S&P 500 posted its worst annual performance since 2002. The Dow average, down 0.6 percent, had its smallest change since 1926. The Nasdaq Composite Index ended the year up 1.4 percent, the smallest move since it started in 1971.

This week, the S&P 500 fell 1.6 percent to 1248.29. Energy shares including Exxon Mobil Corp., the index's top performers this year, declined, fueling the sell-off. The Dow average dropped 1.5 percent to 10,717.50. The Nasdaq retreated a fourth straight week for its longest losing streak since August, falling 2 percent to 2205.32. All three indexes fell the most since the week ending Oct. 7.

This week's drop puts in jeopardy the ``Santa Claus'' rally. The S&P 500 had averaged a 1.6 percent advance during the last five trading days of the year and the first two in January since 1969, according to the Stock Trader's Almanac.

Yield Curve

The yield on the benchmark two-year Treasury yield ended the week at 4.40 percent, according to bond broker Cantor Fitzgerald LP. The 10-year note yielded 4.39 percent. An inverted curve, where short-term yields exceed long-term yields, last occurred in December 2000 and has come before each of the past four economic downturns.

The Federal Reserve has spurred the climb in short-term yields by raising the benchmark U.S. interest rate eight times this year to 4.25 percent. Investors are optimistic that policy makers will end their rate increases next year, sparking bigger gains for the stock market.

A 40 percent surge in crude oil prices to $61.04 barrel in 2005 joined higher interest rates in weighing on the broader market, while making energy producers more attractive to investors. Crude prices reached a record $70.85 in August as Hurricane Katrina approached the Gulf states.

`Overhangs'

``Volatile energy costs, rising interest rates, although we think that will go away in the first half of the year, that was an overhang,'' said Nick Raich, director of equity research at National City Private Client Group in Cleveland. ``One of the overhangs will be ended in the Fed tightening'' and stocks will rise in 2006.

Wall Street agrees with Raich, calling for a 7.1 percent rise in the S&P 500 to 1337, according to the average forecast of 13 strategists polled by Bloomberg News. Alan Greenspan's 18-year term as Fed chairman ends on Jan. 31 and White House economic adviser Ben Bernanke is awaiting Senate confirmation to succeed him.

Energy stocks, which posted the top rally in the S&P 500 this year, retreated. A gauge of energy shares fell 1.8 percent this week. In 2005, the group surged 29 percent, more than double the next best gain among 10 industry groups.

Exxon, the world's largest publicly traded oil company, lost 1.6 percent this week, trimming its yearly advance to 9.6 percent. Sunoco Inc., the No. 1 oil refiner in the U.S. Northeast and up 92 percent in 2005, dropped 2.1 percent. Valero Energy Corp., the best performing stock in the S&P 500 this year with a 127 percent surge, dropped 2.3 percent this week.

Google, Apple

XTO Energy Inc., a natural-gas producer, was the worst performing energy-related stock in the S&P 500 this week, declining 4.6 percent and trimming its 2005 rise to 66 percent.

Some of the stock market's biggest winners of 2005 besides energy companies were losers this week.

Google Inc., owner of the world's most used Internet search engine, more than doubled this year, reaching as high as $446.21. The stock this week fell 3.7 percent to $414.86. Google agreed Dec. 23 to buy 5 percent of Time Warner Inc.'s AOL for $1 billion.

Apple Computer Inc., whose shares more than doubled this year on surging iPod sales, dropped 2 percent since Dec. 23. The company's Macworld Expo, where it will likely unveil new products, begins on Jan 8.

Hotel Rally

General Motors Corp. climbed the most of any company in the Dow average this week, rebounding after touching its lowest price in 23 years on Dec. 29. Shares of the world's largest automaker jumped 3.1 percent. For the year, GM was the Dow's worst performer, plunging 52 percent amid losses the last four quarters and sagging U.S. market share.

Hilton Hotels Corp. climbed after it agreed to buy the lodging unit of Watford, England-based Hilton Group PLC for $5.71 billion. It will become the world's largest hotel company by properties after the deal, with 2,800 hotels in 80 countries.

Hilton shares rose 6.7 percent and the deal lifted the stocks of other hotel companies.

To contact the reporter on this story: John Melloy at jmelloy@bloomberg.net.

Last Updated: December 31, 2005 09:05 EST