For the third straight day, major stock proxies fell sharply after inflation warnings from a Fed official. But in contrast to the prior two days, some last-minute bottom-fishing helped the indices recover most of the lost ground by the close. But a selling bias and negative sentiment clearly dominated Thursday's session.

The Dow Jones Industrial Average finished down 30.26 points, or 0.3%, at 10,287.10, after earlier sinking to as low as 10,218.09. Still, the Dow has lost 350 points, or 2.7%, so far this week. Notable laggards among Dow components included Caterpillar ( CAT), Altria ( MO) and Hewlett-Packard ( HPQ).

Several stocks helped cushion the losses for the blue-chip average on Thursday, including Wal-Mart ( WMT). The retail giant said same-store sales rose 3.8% in September and expects an increase of 2% to 4% for October. General Electric ( GE) also gained after raising its earnings guidance.

The S&P 500 fell 4.90 points, or 0.41%, to 1191.49, off an earlier low of 1,182.24. The S&P has lost 37 points, or 3% in the four sessions through Thursday's close.

The broad average was again weighed down by steep losses in energy shares, as the price of crude oil fell below $62 per barrel. The Amex Oil Index fell 2.15%, led lower by the likes of Amerada Hess ( AHC), Occidental Petroleum ( OXY), Chevron ( CVX) and Valero ( VLO).

The Nasdaq Composite remained relatively weak throughout the day, closing down 18.94 points, or 0.9%, to 2084.08 vs. its intraday low of 2069.04. So far this week, the Nasdaq has lost 67 points, or 3.1%. On Thursday, the index was hampered by weakness in big-caps such as Intel ( INTC), Apple ( AAPL) and Amgen ( AMGN).

It was once again Dallas Fed President Richard Fisher who led an already nervous market to further downside Thursday. Fisher -- made famous for using baseball analogies to wrongly signal the Fed would soon end hiking interest rates back in June -- has returned to the public sphere after more than three-months of being kept under wraps.

But there's no more talk of ending rate hikes from Fisher.

Quite the contrary. Now that soaring energy prices and inflation fears are dominating market sentiment, Fisher now seems to have taken the lead in terms of hawkishness. After his warnings on inflation helped spark a selloff Tuesday, the Dallas Fed president's speech on Thursday is leading some market participants to wonder if the central bank plans to get more aggressive.

Inflation, Fisher said, shows "little inclination" of declining, especially as businesses may be more aggressive at passing through higher energy costs. Inflation, Fisher went on, is a "virus" that cannot be allowed to "poison the system," alluding to the 1970s.

Market players are wondering whether this was just "another rookie comment," and whether "Fisher is sounding alarmist at a time when it isn't necessary," says Tony Crescenzi, Miller Tabak's interest-rate strategist and RealMoney.com contributor. If not, then the Fed may be trying to signal it may hike interest rates by 50 basis points, instead of the quarter-point hikes it has delivered over the past 15 months.

Despite rising expectations of more Fed tightening, the dollar sank against the euro, another development keeping inflation concerns fresh on investors' minds. The European Central Bank, also facing concerns about rising oil prices and inflation, said that it stands ready to lift interest rates at "any time." The ECB hasn't raised rates in five years.

The comments led the euro to rise to $1.21 from $1.19 on Wednesday. But the greenback already had fallen on the back of Wednesday's report of weak growth and rising inflation in the service sector of the U.S. economy.

"There is the fear that the Fed is no longer ahead of the curve," says Ashraf Laidi, currency strategist at MG Financial Group. "Its monetary tightening is no longer seen simply as normalizing rates in a steady-growth environment. It now seems to be shifting to negative tightening, where it's fighting inflation at the risk of hurting growth."

Meanwhile, if markets stay on growth and inflation alert, there may be more downside after Friday's employment report. Wall Street economists expect the economy to have shed 150,000 payrolls in September, mostly due to the impact of Hurricane Katrina's hit to the Gulf Coast.

But average hourly earnings have likely edged up above trend, says Ethan Harris, chief U.S. economist at Lehman Brothers. Many workers in southeastern states hit by Katrina received their full paychecks while not working a full week when the Bureau of Labor Statistics did its survey.

No one really knows how this nervous market will respond to the report. Given the Fed's inflation rhetoric, a stronger-than-expected report might simply further fuel inflation concerns. Conversely, a weaker than expected report may only confirm risks to growth.

The only known, it seems, is the unknown: The consensus on Wall Street is that this employment report will not give a very clear picture of the labor market.

To view Gregg Greenberg's video take on today's market, click here .

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.

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