Reuters Wall Street falls as rate worries dent recovery hopes

NEW YORK (Reuters) - U.S. stocks fell on Wednesday on worries that rising interest rates could put a damper on consumer and business spending, but stocks pared losses late in the session to finish off the day's lows.

The market had extended losses after a 10-year Treasury note auction sparked a sell-off in bonds, pushing yields briefly above 4 percent for the first time since October. Stocks recovered from the sell-off after the bond market rebounded, with the yield at 3.9455 percent.

Investors are worried that higher yields, which act as a benchmark for many lending rates, could handcuff an economic recovery.

Interest rate-sensitive stocks, such as homebuilders and financials, were among the primary laggards, with the Dow Jones U.S. Home Construction index .DJUSHB off 1.5 percent and the S&P Financial index .GSPF down 1.6 percent.

"Rising interest rates are a headwind for the market," said Todd Salamone, vice president of research at Schaeffer's Investment Research in Cincinnati.

The Dow Jones industrial average .DJI fell 24.04 points, or 0.27 percent, to 8,739.02. The Standard & Poor's 500 Index .SPX slid 3.28 points, or 0.35 percent, to 939.15. The Nasdaq Composite Index .IXIC dropped 7.05 points, or 0.38 percent, to 1,853.08.

In its latest Beige Book survey of the economy, the Federal Reserve said U.S. economic conditions were weak or worsened through May, but some areas of the country saw signs the contraction was moderating.

U.S. crude oil futures rose to their highest level in seven months at over $71 a barrel, lifting energy companies. ExxonMobil (XOM.N) rose 1 percent to $73.84 and was the top boost to the Dow. The PHLX Oil Service Sector index .OSX gained 1.4 percent.

While gains in oil and other commodities had earlier supported stocks globally on hopes economic activity was quickening, U.S. investors worried that higher prices would fuel inflation and dent an economic recovery.

Trading was low on the New York Stock Exchange, with about 1.22 billion shares changing hands, below last year's estimated daily average of 1.49 billion, while on Nasdaq, about 2.35 billion shares traded, above last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on the NYSE by 1635 to 1376 while decliners beat advancers on the Nasdaq by about 1624 to 1038.

(Additional reporting by Ellis Mnyandu; Editing by Leslie Adler)