Updated from 4:00 p.m. EST

Soaring yields on the 10-year Treasury note triggered heavy selling in stocks Wednesday, derailing the recent rally that had taken the

Dow

and

S&P 500

to their highest levels since June 2001.

The Dow closed down 107.00 points, or 1%, to 10,805.62, its third loss in a row since hitting a near four-year high last Friday. The S&P 500 fell 12.42 points, or 1%, to 1207.01, while the

Nasdaq

shed 12.26 points, or 0.6%, to 2061.29.

McDonald's

(MCD) - Get Report

, which fell almost 3% on an analyst downgrade, and

Exxon Mobil

(XOM) - Get Report

, which fell almost 4% as a brokerage executed three enormous block trades, weighed on the Dow.

Trading volume on the

New York Stock Exchange

was 1.56 billion shares, with decliners beating advancers by a ratio of about 3 to 1. Volume on the Nasdaq was 1.74 billion shares, with decliners outpacing advancers 2 to 1.

Strong sectors on Wednesday included semiconductors and materials. Weaker sectors in the market included homebuilding, airlines, energy, health care and retail.

Oil soared after the release of mixed data on inventories, missing the record intraday high of $55.67 a barrel by 2 cents, but closed just 18 cents higher at $54.77. The U.S. Department of Energy said that crude inventories rose by 3.2 million barrels for the week ended March 4. Gasoline stocks fell 200,000 barrels, while distillate inventories dropped by 800,000 barrels.

Investors had a close eye on the credit markets. The 10-year Treasury note fell 29/32 in price to yield 4.51%, a level not seen since last August. Just a month ago, the yield briefly slipped below 4%. The dollar fell against the yen and euro.

"The market is going to have to get used to the impact of higher interest rates for the near term," said Barry Hyman, equity market strategist with Ehrenkrantz King Nussbaum. "After so many false moves on the rates getting above 4.10% a short while ago, we see a solid move to over 4.50%, and there will be an adjustment process for a near-term correction. Without the price of oil reversing, which could help offset some of this, I think the equities will have to have a period of adjustment. There is a possibility that the

Fed's

moderate tone may change over the next one or two meetings. It certainly looked better a few days ago."

The benchmark Treasury bond is down more than a point since Monday, feeding off the falling dollar, which in turn has pushed up commodity prices.

"Yields broke through a psychological level of 4.40%, and people are underestimating higher interest rates affecting the economy," said Peter Boockvar, equity strategist with Miller Tabak & Co. "Rates are reaching high levels while we have stock markets that are up over their four-year highs. The markets will not be able to sustain these levels in the face of this."

European Central Bank President Jean-Claude Trichet said at a conference in Frankfurt on Wednesday that the ECB would begin raising interest rates if inflation expectations merit action.

"It is essential ... that people know we'll act when necessary," Trichet said.

In other economic news, the

Federal Reserve

released its regional Beige Book survey Wednesday afternoon, which saw moderate growth and some price pressures.

"Labor markets strengthened in almost all districts. While wages continued to increase at a moderate pace, employers in many districts reported ongoing pressures from higher benefit costs," the Fed said. "Manufacturing activity was reported as expanding solidly in most districts, although the pace of growth has generally not increased since the last report. Sustained increases in the cost of energy, steel and other materials were widespread. Despite the stability in consumer goods prices, manufacturers in a number of districts -- including Boston, Cleveland, Kansas City and Dallas -- indicated that they have been finding it increasingly easy to pass along price increases."

Xilinx

(XLNX) - Get Report

fell despite raising its revenue guidance for the fourth quarter. The semiconductor company expects to post sales of $372.8 million to $382.8 million, above the Wall Street consensus of $367 million. The company reiterated gross margin guidance of 62%. Both Wachovia and Smith Barney upgraded the company, to outperform and buy, respectively. Shares, having held gains for most of the trading session, finished down 19 cents, or 0.6%, to $31.27.

Xilinx's outlook brought buyers back into tech stocks a day after

Texas Instruments

(TXN) - Get Report

scared them off with its quarterly update.

Intel

(INTC) - Get Report

,

Cisco

(CSCO) - Get Report

and TI all finished Wednesday in the green.

Another gainer Wednesday was

Retek

(RETK)

, which now looks to be the subject of a bidding war between

Oracle

(ORCL) - Get Report

and

SAP

(SAP) - Get Report

. Oracle offered to buy the retail-industry software provider for $9 a share Tuesday night, topping a previous offer from SAP, which bid $8.50. SAP said overnight that it is reviewing the situation. Retek added $2.04, or 23.7%, to $10.63.

The merger marathon continued Wednesday, as

Crompton

(CK)

agreed to buy

Great Lakes Chemical

(GLK)

for $1.8 billion in stock and assumed debt. Crompton jumped $1.85, or 13.7%, to $15.31, while Great Lakes soared $6.42, or 23.6%, to finish at $33.60.

Kmart

(KMRT)

reported fourth-quarter net income of $309 million, or $3.09 a share, a 14% increase year over year. Excluding items from bankruptcy-related gains and sales of assets, earnings were $259 million, or $2.59 a share, for the quarter. The increase in earnings was attributed to reductions in the cost of goods and lower expenses. However, sales fell 7% to $5.91 billion, while same-store sales were down 4.5% in the quarter. Shares gained $2.42, or 2.2%, to $111.66.

Blockbuster

(BBI) - Get Report

reported a fourth-quarter profit of $900,000, or break-even on a per-share basis, vs. a loss of $1.19 billion, or $6.57 a share, a year ago. Earnings included compensation charges in the fourth quarter and noncash impairment charges from 2003. Excluding those items, the movie rental company reported profit of 7 cents a share, down from 32 cents a year ago. Analysts had expected earnings of 4 cents a share, according to Thomson First Call.

Also on Wednesday, Blockbuster extended its offer for shares and notes of rival

Hollywood Entertainment

(HLYW)

through March 24. Blockbuster rose 72 cents, or 8.3%, to $9.44. Hollywood shares added 2 cents, or 0.1%, to $14.17.

Wendy's

(WEN) - Get Report

said same-store sales at company-owned U.S. restaurants fell 2.4% in February, a larger decline than expected by analysts, due to winter storms mostly in the Northeast. At U.S. franchise restaurants, same-store sales fell 0.7% for the month, in line with expectations. Wendy's finished 78 cents, or 2%, lower at $38.92.

In brokerage action, CSFB downgraded

McDonald's

(MCD) - Get Report

to neutral from outperform, citing concerns of weakness in European markets. On Tuesday, McDonald's said February same-store sales were down 3.4% in Europe while U.S. restaurants saw a 4.6% increase. Shares were off 95 cents, or 2.8%, to end at $32.53.

Overseas markets were mixed with London's FTSE 100 closing down 0.3% to 4996 and Germany's Xetra DAX falling 0.5% to 4375. In Asia, Japan's Nikkei rose 0.7% overnight to 11,966, while Hong Kong's Hang Seng added 0.4% to 13,941.