Stocks suffered their biggest pullback in two months as a disappointing bond auction and a lackluster report on sales of existing homes halted the market's two-day rally.
The market drifted lower for much of the session after the National Association of Realtors said sales of U.S. existing homes fell 0.8% in December. Then, in the afternoon, a less-than-enthusiastic reception for the Treasury's latest sale of five-year notes sent bond prices falling and yields rising sharply, rattling stock investors already worried about higher rates.
Stocks fell further while the yield on the 10-year Treasury note rose to a three-month high.
Just three of the 30 stocks making up the Dow Jones Industrial Average ended the day positive. Both the Dow and the S&P 500 logged their largest one-day declines since November.
"We've had a big rally and so far and it looks like some normal profit-taking," Al Goldman told CNBC.com. "I think it’s just the market's own internal dynamics. Shake it all up and this is just the way markets act.
"I'm still cautiously optimistic," he added. "If we didn't have down days we'd have no marketplace."
Selling was across the board with all of the S&P 500 sectors trading lower, including the technology and materials sectors, which were positive earlier in the session. Poor earnings guidance drove down consumer discretionary stocks. Energy was the worst performing sector, dragged down by lower oil prices.
"I think what you are seeing is disappointment because traders came in this morning encouraged that they had seen a turn in the market," Arthur Cashin, UBS Director of Floor Operations, told CNBC.com. "But we were unable to achieve any momentum, so some people started to take profits."
The financial sector dropped as investors took profits in major brokerages that hit record highs on Wednesday, including Goldman Sachs and Lehman Brothers .
Auction site eBay rose significantly. Investors took eBay's results, reported after the bell Tuesday, as a sign of strength in its main auction business and its forecasts as a good indicator for revenue growth.
And handset maker Nokia topped quarterly profit and sales expectations.
"This is really a company-by-company stock market, particularly in tech," David Stepherson, Senior Portfolio Manager at Hardesty Capital Management, told CNBC. "There really are a lot of good, solid relative values in the technology space that are probably going to end up driving much of the stock market's move in 2007."
Ford Motor posted the largest deficit in the automaker's 103-year history. Ford said it lost $5.8 billion in the fourth quarter due to slumping sales and huge restructuring costs. That brings Ford's deficit for the year to $12.7 billion.
Beazer Homes reported a first-quarter loss of $1.54 per share. The Atlanta-based home builder cast renewed doubt on the sectors prospects, saying it has yet to see any meaningful evidence of a sustainable recovery in the housing market.
Shares of KB Homes , Toll Brothers and Lennar Corporation all traded lower.
AT&T was one of the Dow winners again after the company said fourth-quarter earnings rose 17%, due to record growth in its wireless business. The nation's largest provider of phone, wireless and broadband Internet also said it expects to generate sharply higher savings from its acquisition of BellSouth than originally forecast.
Crude oil futures tumbled below the $55 per barrel level on the New York Mercantile Exchange as the Energy Department reported a draw down in natural gas supplies last week of 179 billion cubic feet, largely in line with expectations.
Natural gas futures fell because traders still expect an inventory surplus at the end of the heating season.
Stocks in Europe, Asia End Down
Germany's DAX , the CAC-40 in Paris and the FTSE-100 in London all closed lower.
Tokyo's Nikkei 225 Average closed lower after previously hitting a new six-year high and South Korea's Kospi Index ended flat.