US shares drop on China inflation worries

US stocks ended lower on Friday, snapping a five-week winning steak, as the threat of rising interest rates in China prompted investors to book profits and reassess bullish positions in equities.

The Dow Jones Industrial Average dropped 90.52 points, or 0.8 per cent, to end at 11,192.58. The Standard & Poor's 500 Index dropped 14.33 points, or 1.2 per cent, to 1199.21 and the Nasdaq Composite Index dropped 37.31 points, or 1.5 per cent, to 2518.21.

SPI futures were 19 points lower at 4689, pointing to losses at the start of local share trade on Monday. Big falls in the prices of key commodities are likely to put selling pressure on mining shares such as BHP Billiton and Rio Tinto. The dollar extended its retreat in overseas trade, sliding to 98.6 US cents, after closing locally on Friday at 99.11 US cents.

Advertisement: Story continues below Investors on Wall Street worried tighter credit in China would curb demand for commodities, driving down energy and natural resource stocks. The two sectors were the biggest drag on the S&P.

A string of global worries, including debt problems in Ireland, have prompted investors to reassess their positions or at least buy protective options so they can define their risk, said TD Ameritrade chief derivatives strategist Joe Kinahan in Chicago.

Reflecting the concerns, the CBOE Volatility Index jumped 10.6 per cent to 20.61, the first time the index has closed above 20 since late October. The CBOE Nasdaq 100 Volatility Index also surged 16.4 per cent to 22.55.

"Whenever you see volatility indexes rising like this, that indicates that people are searching for protection in the options market either in the indexes, exchange-traded funds or individual equities," Kinahan said.

The S&P 500 dipped below its 20-day moving average on Friday for the first time since September 1 but managed to close above it, in a sign that that level, currently just above 1194, could provide strong technical support.

Stocks have stalled in recent sessions after a two-month rally that climaxed last week, when the Dow and Nasdaq hit levels not seen since the collapse of Lehman Brothers in September 2008.

For the week, the Dow and the S&P 500 each lost 2.2 per cent and the Nasdaq fell 2.4 per cent. The two sectors that did the worst were financial stocks, down 4 per cent for the week, and information technology stocks, off 3.2 per cent.

US December crude oil futures fell 3.3 per cent on Friday and copper was off nearly 3 per cent. That weighed on cyclical stocks, with aluminum producer Alcoa, the Dow's second-largest percentage loser, slumping 2.3 per cent to $US13.49.

Among the Dow's other major decliners, Exxon Mobil was off 1.2 per cent at $US70.99, while heavy machinery maker Caterpillar was down 1.7 per cent at $US81.04. The S&P energy index slid 1.4 per cent, while the S&P materials index lost 2.2 per cent.

This is the second time the index shied away from the 1228 area, and its chart could be drawing a bearish "double top" formation. After the last retreat from that level in April, the S&P 500 started a correction that took it down to its July lows.

The Shanghai Composite Index tumbled 5.16 per cent, notching its biggest percentage loss in over a year on the likelihood China's central bank was set to raise rates to tackle inflation, a move that could pressure future growth.

"The whole commodity complex is exceptionally weak after the overnight action in China, and we need to see how it all plays out," said Tom Samuels, managing partner at Palantir Capital Management in Houston. "This may be the first seed of doubt about the healing power of （quantitative easing）."

In the last hour of trading, options traders were busy making short-term hedges as the market declined. Put trading surged in the SPDR S&P 500 fund weekly options that expired after the close, said Scott Fullman, director of derivatives investment strategy at WJB Capital Group, in New York.

Boeing was the Dow's top percentage loser, shedding 3.5 per cent to $US63.09 after Sanford C. Bernstein cut its rating on the stock to "market perform," citing more potential delays for its 787 Dreamliner.

Worries that Ireland may default on its debt as well as declines in commodity prices and an unexpectedly weak outlook from Cisco Systems helped cloud the market's outlook, though some investors said the underlying trend is strong.

On the upside, Intel rose 1.5 per cent to $US21.53 after the chipmaker boosted its dividend.

Trading volume was about 8.12 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq, compared with the year-to-date daily average of 8.72 billion.Nearly five stocks fell for every one that rose on the New York Stock Exchange, while on the Nasdaq, four stocks fell for every one that rose.