Stocks Slide After Service-Sector Report

Hip, hip hoora--

Just as soon as the post-jobs relief rally began, it was over. Before we were even a half-hour into the trading day, major indexes turned mixed amid weakness in chips, housing, banks and airlines.

The stock market will close early at 1 pm ET due and the bond market will close at 2pm ET. All U.S. financial markets will be closed Friday in observance of the Fourth of July holiday.

Then came a report that showed the services sector slipped into contraction mode last month and the indexes were spiraling lower.

The ISM said its nonmanufacturing index dropped to 48.2 in June from 51.7 in May and lower than the 51 reading expected. Anything below 50 indicates contraction. New orders declined. A gauge of service-sector emploment was the lowest on record -- not a good sign for the next jobs report -- and a measure of prices soared to the highest in the survey's 11-year history.

The services sector accounts for a whopping 80 percent of economic activity, including businesses suchs a banks, airlines and hotels and restaurants.

The thinly-traded pre-holiday market had initially cheered the fact that the June jobs report wasn't worse than expected.

U.S. employers shaved 62,000 jobs from nonfarm payrolls in June, roughly in-line with the 60,000 drop expected. It was the sixth straight month of decline and the April and May payroll figures were revised to show 52,000 more jobs were lost than previously thought. The unemployment rate held steady at 5.5 percent.

Robert Brusca of Fact and Opinion Economics summed up the report this way: "...and the good news is: That the bad news isn’t worse."

Since March, nonfarm employers have cut 190,000 jobs, points out Joel Naroff, president of Naroff Economic Advisors. "While this is not huge, by any means, it is consistent with an economy that is in a deep funk," he wrote in a morning note.

(For reactions to the June jobs report, click on the video at left.)

A separate report showed weekly jobless claims rose by 16,000, and the four-week moving average climbed 11,250 to 390,500 claims.

In Japan, the Nikkei 225 average fell for an 11th straight session, the index's longest losing streak since 1953.

The European Central Bank raised a key European rate by a quarter percentage point to 4.25 percent.

The downturn in the U.S. economy is a greater worry than inflation at the moment, Treasury Secretary Henry Paulson said during his tour of Europe, adding that core inflation, excluding volatile food and fuel prices, was still tame.

Oil prices were trading in record territory, around $144 to $145 a barrel, amid worries about the weak dollar and supply concerns.

In the financial sector, Lehman Brothers plans to issue stock to its employees, in an attempt to encourage top talent to remain at the investment bank, CNBC has learned.

General Motors shares bounced after falling below $10 for the first time in more than 50 years during the prior session.

British Airways is said to be close to seeking clearance from competition authorities for a three-way operational merger with AMR's American Airlines and Spanish Iberia, according to the Times of London and the Financial Times.

Still to Come:

THURSDAY: ISM services index; Stock market closes at 1pm ET and bond market closes at 2pm ET
FRIDAY: All major U.S. markets closed for Fourth of July holiday

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