Rise in Bond Yields Sends Dow Tumbling 31.23 Points : Markets: Stocks clipped by government report showing inflation in the first quarter grew faster than expected.

U.S. Treasury bond yields posted one of their biggest one-day rises ever as a government report showed that inflation grew faster than expected in the first quarter.

The rise in yields dashed hopes that interest rates will decline further soon, in turn pushing stocks sharply lower.

The Treasury’s main 30-year bond yield jumped to 7.26% from 7.10% on Tuesday. Its price, which moves in the opposite direction, tumbled $17.50 per $1,000 in face value.

On Wall Street, the Dow Jones industrial average fell 31.23 points to 3,668.31 as 323.76 million shares changed hands. In the broader market, declining issues outnumbered advancers by about 4 to 3 on the New York Stock Exchange.

Blue chip stocks underperformed smaller issues. The NYSE’s composite index fell 1.28 to 249.13. The Nasdaq index of mostly smaller companies declined 2.52 to 731.69. The S&P; 500 lost 2.77 to 449.10.

The surge in long-term interest yields reversed a weeklong retreat, killing hopes for a lasting decline that in turn would ease pressure on the Federal Reserve Board to further tighten credit. Some economists fear that further rate hikes, which in turn would drive up mortgage and other borrowing rates, could stifle the economic recovery.

The Commerce Department reported that the nation’s gross domestic product grew at a moderate 2.6% annual rate in the first three months of the year. That was less than the 3.2% expected by many economists.

Bond prices initially rose on the news, because slower growth can check inflationary pressures. Inflation tends to diminish the value of investments that pay a fixed rate of interest, such as bonds.

However, bond prices deteriorated after analysts took a closer look at an inflation index tied to the GDP. The index rose at an annual rate of only 2.6% in the first quarter, but the growth was steeper than expected and the biggest increase since the first quarter of 1993.

The selloff accelerated after bond prices failed to break above a key technical resistance level.

News of dismal demand at the Treasury’s sale of five-year notes Thursday--the second stage of the monthly auction--accelerated the market’s tailspin.

The Treasury announced in early afternoon that it sold $11 billion in notes at a high yield of 6.60%. That was higher than the 5.56% that many market participants had expected, indicating that the government was forced to offer higher rates to try to drum up demand.

Demonstrating the poor response, the bid-to-cover ratio--a measure of auction demand that compares the number of bids received to those accepted--was 2.13 to 1. That was down from an average of 2.70 in the last 20 auctions of five-year notes.

One observer said the auction results were among the worst on record.

U.S. financial markets were closed Wednesday to observe a national day of mourning for former President Richard Nixon.

Analysts and traders appeared dismayed at the degree to which the equity market was tied to bonds.

“They’re just in lock-step with that sucker,” said Ralph Acampora, market analyst for Prudential Securities. “It really is too bad. I thought from an equity point of view we had a market that was washed out and pretty bearish, and we could get a recovery going here, but that turns out not to be the case.”

Among the market highlights:

* SciClone Pharmaceuticals and Alpha 1 Biomedical shares lost about two-thirds of their value after their hepatitis drug failed to perform better than a placebo in clinical tests. SciClone shares closed down 7 9/16, or 60%, at 5 3/16. Alpha 1 fell 4 13/16, or 68%, to close at 2.

* Among cyclical stocks, Caterpillar dropped 1 3/4 to 108 7/8, Deere shed 1 3/8 to 77 1/2, Alcoa ended off 7/8 to 67 7/8 and Ingersoll-Rand lost 1 to 34 1/2.

* Chevron fell 2 1/4 to 88 5/8 following a drop in oil prices.

* Airline stocks rose, assisted by Delta, which jumped 1 7/8 to 45 1/4 after the company said it will eliminate up to 15,000 jobs, or 20% of its work force.

* Technology stocks fell as investors took profits in this sector. IBM fell 1 3/8 to 57 1/8 after the Wall Street Journal reported that the computer giant was behind schedule in firing 28,000 people, a goal it set last July.

Shares closed lower in foreign trading. In London, the Financial Times 100-share average closed down 20.1 points to 3,129.9; Frankfurt’s 30-share DAX average ended at 2,251.22, down 2.35 points.

Tokyo’s Nikkei 225-share average closed down 3.90 points at 19,725.25, while Mexico’s Bolsa index fell 11.55 points to close at 2,321.33.