NEW YORK (AP) - Wall Street pulled back for the third straight day yesterday as many investors, still uneasy about the economy, sold off after a Federal Reserve official suggested rising inflation could prevent the central bank from making further interest rate cuts.

Although the economic slowdown is a big concern, "we must not lose sight of the other part of the Fed's dual mandate - which is price stability," Federal Reserve Bank of Philadelphia president Charles Plosser said, according to Dow Jones Newswires. The economy has been weakening but costs remain high, leading some economists to believe that the US is headed for a troubling predicament known as stagflation.

Mr. Plosser's comments were not surprising, particularly since he is known for being more apt to argue against a rate cut than other Fed members. Nonetheless, the speech - along with a dismal sales report from Macy's - sapped some of Wall Street's relief yesterday over better-than-expected fourth-quarter productivity and labour cost data and profit results from Walt Disney Co.

"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."

After climbing until early afternoon yesterday, stocks switched gears and began extending the losses they made on Tuesday, when the Dow Jones industrial average suffered its biggest percentage drop since February 27, 2007. The trigger that day was the Institute for Supply Management's report of a surprising January contraction in the US service sector - news that bolstered the argument that the nation is in recession.

"There's no smoking gun here; we get one bad number, one good number....We're probably going to chop around here until investors get a better feel on this recession-or-no-recession question," said Phil Orlando, chief equity market strategist at Federated Investors.

According to preliminary calculations, the Dow fell 65.03, or 0.53 percent, to 12,200.10, after rising more than 100 points in earlier trading.

On Tuesday, the blue-chip index dropped 370 points, or 2.93 percent, and on Monday it lost 108 points. Because it rallied so strongly last week, it remains above the 15-month trading low it sank to in late January.

Broader stock indicators also gave up gains yesterday. The Standard & Poor's 500 index fell 10.18, or 0.76 percent, to 1,326.46, and the Nasdaq composite index fell 30.82, or 1.33 percent, to 2,278.75.

Government bond prices remained lower on the stronger-than-anticipated economic data. The yield on the 10-year Treasury note, which moves opposite its price, rose to 3.60 percent from 3.56 percent late on Tuesday.

Stocks have been extremely volatile lately, given the uncertainty in the market about whether a recession is here, how long it might last, how deep it might be and how it may affect corporate profits.

"You'll find pockets of differentiation in the economy, but the overarching theme is that things are slowing down," said John O'Donoghue, co-head of equities at Cowen & Co.

Macy's Inc. yesterday afternoon said sales at stores open at least a year fell 7.1 percent in January compared to the same month a year ago, worse than expected. The department store operator also said it is cutting 2,550 jobs. Macy's fell $1.16, or 4.6 percent, to $23.94.

Corporate profits for the fourth quarter have been all over the map, but generally, they have been decent outside the financial and consumer discretionary sectors.

Walt Disney posted a 26 percent decline in profit late on Tuesday, but the results beat expectations. The company - one of the 30 companies that make up the Dow Jones industrials - reported a nine percent rise in revenue, thanks in part to successful brands such as ESPN, "High School Musical" and "Hannah Montana." Disney shares rose $1.43, or 4.8 percent, to $31.50.

Time Warner Inc. yesterday posted a profit decline in its fourth quarter. But excluding the effect of a year-ago gain from the sale of AOL's online access business in Europe, profit rose due to better results at the media conglomerate's cable TV and movie operations. Time Warner rose 31 cents, or two percent, to $15.71.

And late on Tuesday, JDS Uniphase Corp., which makes communications test and fiber-optic network equipment, said its fiscal second-quarter earnings of fell slightly year-over-year but widely surpassed Wall Street estimates. JDS Uniphase shot up $2.64, or 26 percent, to $12.80.

The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude oil dropped $1.27 to $87.14 a barrel on the New York Mercantile Exchange.

The Russell 2000 index of smaller companies fell 9.09, or 1.30 percent, to 692.49.

Declining issues outnumbered advancers by about five-to-three on the New York Stock Exchange, where volume came to 1.54 billion shares.

Overseas stocks were mixed. Japan's Nikkei stock average dropped 4.7 percent and Hong Kong's Hang Seng index fell 5.4 percent. In Europe, Britain's FTSE 100 rose 0.13 percent, Germany's DAX index rose 1.22 percent, and France's CAC-40 rose 0.83 percent.