FINANCIAL MARKETS : Inflation Fears Are Rekindled; Dow Falls 46.77

U.S. stocks plunged Thursday amid renewed fears that the Federal Reserve will boost interest rates at the end of the month.

Meanwhile, Mexico’s stock market sagged nearly 5%, leading most Latin American stocks markets sharply lower.

The Dow Jones industrial average, which was skewed by a sharp drop in Caterpillar shares, fell 46.77 points to 3,882.21, posting its biggest decline since Dec. 8 and almost erasing the 70-point-plus net gain over the previous four trading sessions.

Wall Street’s losses were deep and broad, with declining issues leading advancers by nearly 2 to 1 on the New York Stock Exchange. Big Board volume fell to 314.06 million shares from 345.21 million on Wednesday.

Blue-chip stocks took the brunt of the losses, but broad market indexes moved lower as well. The NYSE composite index fell 1.59 points to 254.38 and the Standard & Poor’s 500-stock index declined 2.77 points to 466.95.

The Nasdaq composite index slid 3.83 points to 768.55, while the American Stock Exchange’s market value index edged down 0.44 point to 439.53.

The Dow dropped 50 points in the last 30 minutes of trading, prompting the New York Stock Exchange to restrict high-volume computerized selling.

The catalyst for Wall Street’s selloff was a report that the Philadelphia Federal Reserve’s index of area business activity slid to 10.4 in January from 26.5 in December. Even with that sluggish manufacturing performance, the Fed’s index of prices paid to area manufacturers leaped to 55 from 44.1, and prices received rose to 24.4 from 19.

Investors had begun the week believing that inflation was not worrisome enough to prompt the Fed to raise interest rates at its policy meeting at the end of the month. Stock investors dislike higher interest rates because they increase corporate borrowing costs and cut into earnings.

But analysts said the Philadelphia Fed’s report, plus data released earlier this week on industrial production and manufacturing capacity, showed insurgent inflation that could spur the central bank to tighten after all.

Stocks also responded to a rise in bond market yields, where the 30-year Treasury closed at 7.82%, up from 7.77%. Its price, which moves in the opposite direction, was off half a point, or $5. The market was also troubled by weakness in the dollar, which fell against the Japanese yen and the German mark.

The dollar sank to a 10-week low against the mark in a broad technical selloff. It closed in New York at 1.515 marks, down from 1.535 late Wednesday. The dollar slipped to 99.08 Japanese yen, down from 99.70.

However, the greenback was up against the Mexican currency, rising to 5.495 pesos from 5.405 on Wednesday.

Among Thursday’s highlights:

* Caterpillar, which led the Dow lower, slid 3 7/8 to 54 3/4 after reporting earnings slightly below analysts’ expectations.

* General Electric, another Dow component, fell 1 1/4 to 51. The company said fourth-quarter earnings rose to 99 cents a share from 84 cents a year ago. The results were only a penny above analysts’ average expectations.

* Bankers Trust fell 1 1/8 to 57 3/4, and Fleet dropped 2 1/8 to 31. Both companies reported disappointing earnings.

* Intel rose 1 5/16 to 70 11/16 after Nomura Securities upgraded the software company’s stock to “buy” from “hold.”

* Microsoft dropped 1 9/16 to 63 1/2.

* Altera Corp. jumped 3 1/8 to 47 1/4. The company told analysts that orders for its computer products were strong in the latest quarter.

* Telefonos de Mexico led NYSE-traded issues in volume, falling 1 3/4 to 34 1/2, and Grupo Televisa fell 2 1/8 to 22 3/4.

* Herbalife International plunged 5 1/8 to 12 5/8 on the company’s forecast of sharply lower earnings, blaming unexpectedly weak sales in Europe.

* Incomnet plunged 1 3/4 to 10 after disclosing that it is being investigated by the SEC.

* Kimberly-Clark fell 7/8 to 47 7/8 after reporting lower fourth-quarter earnings.

In the Latin American markets, Mexico’s Bolsa index plunged 104.24 points, or 4.83%, to close at 2051.89 as traders anxiously monitored growing U.S. congressional opposition to granting Mexico $40 billion in loan guarantees.

Brazil’s Bovespa index tumbled 2,691 points, or 6.6%, to 38,094, while Argentina’s Merval index fell 17.39 points, or 3.88%, to close at 430.80

Elsewhere overseas, Japan’s Nikkei ended down 147.57 points at 19,075.74, while London’s Financial Times 100-share average fell 26.3 points to 3,028.6. Frankfurt’s 30-share DAX average rose 10.51 points to close at 2,089.36.