US shares fall on economy fears

US stock indexes had begun the session on a brighter note

US shares fell after comments from a Federal Reserve official suggested inflation concerns could prevent further bold interest rate cuts.

The comments squashed speculation that the Fed would cut rates again before its scheduled March meeting to lift the ailing US economy.

The benchmark Dow Jones shed 0.5%, to 12,200.1, while the Nasdaq lost 1.3%.

Gloomy sales figures and sweeping job cuts at US department store Macy's helped to erase earlier gains.

US stock indexes had begun the session on a brighter note thanks to strong results from entertainment giant Walt Disney and upbeat US productivity data.

It just shows you the market's really skittish and temperamental Jim Herrick, director of equity trading, Baird & Co

The latest results from media group Time Warner had also pleased investors.

But recession fears that sent the Dow plunging 3% on Tuesday returned after Federal Reserve policy maker Charles Plosser indicated that the Fed, the US central bank, may have to scale back its bold rate cutting campaign to control rising inflation.

"In taking aggressive action in supporting the economy's eventual return to its trend growth rate, I continue to believe we must not lose sight of the other part of the Fed's dual mandate, which is price stability," Mr Plosser said.

"We cannot be confident that a slow-growing economy in 2008 will by itself reduce inflation."

'Driven by emotion'

In January the Fed slashed interest rates on two occasions in an effort to deal with the worst housing market slump in a quarter of a century and a related credit crisis that is threatening to tip the US into a recession.

But Mr Plosser said the Fed's focus would have to return now to controlling inflation given continued high food and energy costs or it risked losing its credibility.

The comments weighed on investors who had hoped the Fed may have cut rates below 3% before its official rate-setting meeting in March after recent reports showed dismal unemployment numbers and a shock contraction in the service sector in January.

"It just shows you the market's really skittish and temperamental," said Jim Herrick, director of equity trading at Baird & Co.

"I really believe the market is driven by emotion, that there's this want to test the lows again."

A pessimistic mood was exacerbated by lower earnings guidance from Macy's, which also said it would cut 2,300 jobs as part of dramatic efforts to reduce costs and offset falling sales.

Earlier, the UK's FTSE 100 rose 7.4 points to 5,875.4, while Frankfurt's key Dax climbed 1.2% to end at 6,847.5, and the Paris-based Cac 40 had added 0.8% to finish at 4,816.