By Herbert Lash
NEW YORK (Reuters) - U.S. stocks sold off and government bond yields rose on Friday after improved factory activity in the U.S. Midwest and rising consumer sentiment increased anxiety about the Federal Reserve's next move.
U.S. Treasury debt prices ended their worst month in nearly 2-1/2 years. On Friday, bond yields retested their highest levels in more than 13 months, set two days earlier, even though data signaled inflation remained low because of sluggish growth.
Global equity markets fell amid volatile trading on concerns that the Fed may ease its stimulus program, a driver of a strong rally in U.S. stocks and equities elsewhere in the world.
A slide on Wall Street accelerated at day's end, driving the Dow industrials down more than 200 points. The three major U.S. stock indexes fell more than 1 percent amid a rebalancing of the MSCI stock indexes.
"As you sensed the weakening market with drifting lower underlying bids, I think sellers started to get a little nervous, and you started to see different areas of the market coming a little more unglued," said Michael James, managing director of equity trading at Wedbush Securities, in Los Angeles.
The S&P 500 posted consecutive weekly losses for the first time since November as investors took some money off the table after a rally that has pushed the benchmark index up 14.3 percent - the best first five months of a year since 1997.
The S&P 500 ended May up 2.1 percent, its seventh straight month of gains and its longest streak of monthly gains since 2009.
"Traders were going into the end of month long, and traders were going to be sellers at the end of the day, regardless," James said.
The Dow Jones industrial average <.DJI> slid 208.96 points, or 1.36 percent, to close at 15,115.57. The Standard & Poor's 500 Index <.SPX> dropped 23.67 points, or 1.43 percent, to finish at 1,630.74. The Nasdaq Composite Index <.IXIC> fell 35.38 points, or 1.01 percent, to end at 3,455.91.
The dollar advanced after data showed Midwestern factory activity regaining speed, but U.S. consumer spending fell in April for the first time in almost a year and already low inflation declined further.
While the factory data added fuel to growing speculation that the Fed may begin to taper asset purchases, the U.S. central bank's favorite gauge of inflation showed price increases well under its target rate, making a pullback less likely any time soon.
U.S. and German government debt prices reversed course and fell after the Institute for Supply Management-Chicago business barometer jumped to 58.7 from 49 in April, handily beating economists' expectations for a reading of 50.
The dollar rose against several key currencies and posted its eighth straight month of gains against the yen.
Investors and traders are grappling with whether the Fed, looking at a stronger economy, will choose to end its bond-buying program as stocks and housing prices surge.
"If you get the hint or the idea that they're going to start to trim purchases, then this is the volatility that's going to be created around it," said Sean Murphy, a Treasuries trader at Societe Generale in New York.
A Thomson Reuters/University of Michigan survey that showed greater optimism over the economic outlook and personal finances pushed U.S. consumer sentiment to its highest level in nearly six years in May - and initially helped stocks.
A measure of global equities, MSCI's all-country world equity index <.MIWD00000PUS>, fell 1.18 percent.
The bond market recovered in a late surge of buying, pushing the price of the 30-year bond slightly higher for the day.
The benchmark 10-year U.S. Treasury note fell 3/32 in price to yield 2.13 percent, after the yield earlier traded as low as 2.066 percent.
German Bund futures also retreated in rocky trade to end the session almost flat, down 2 ticks at 143.71.
In Europe, the FTSEurofirst 300 index <.FTEU3> leading regional shares finished 0.92 percent lower at 1,216.17.
The index rose 1.6 percent in May to record the best monthly winning streak in its 16-year history.
The euro fell to a session low of $1.2945 and was last at $1.2994, down 0.41 percent for the day.
The dollar rose 0.33 percent to 100.39 yen.
U.S. oil prices fell below $93 a barrel, extending losses after weak consumer spending data. Members of the Organization of Petroleum Exporting Countries agreed to leave their output target unchanged, as expected, with little impact on markets as a result.
Brent oil fell $1.80 to settle at $100.39 a barrel. For the month of May, Brent crude slid 1.9 percent. U.S. crude oil dropped $1.64 to settle at $91.97 a barrel. For the month of May, U.S. crude declined 1.6 percent.
(Additional reporting by Marc Jones in London; Editing by Dan Grebler, James Dalgleish and Jan Paschal)
