(Reuters)
Updated: 2007-01-26 14:00

NEW YORK  - U.S. stocks fell sharply on Thursday as a drop in oil prices hit shares of energy companies, including Exxon Mobil Corp. and investors tried to lock in profits a day after the Dow Jones industrial average hit an all-time high.

Investors were nervous about corporate earnings growth, which is expected to slow in the fourth quarter, after more than four years of double-digit gains. Microsoft Corp.  fell 2.1 percent as investors sold the software maker's stock before its quarterly earnings report.

Also weighing on the market, a report showed sales of existing homes took their biggest tumble in 17 years in 2006, and bond yields jumped to their highest level since August after a five-year Treasury note auction attracted only lukewarm interest.

"It's just a reversal from yesterday," said Tim Smalls, head of U.S. stock trading at brokerage Execution LLC in Greenwich, Connecticut. "The market did not like the housing numbers and I think earnings growth is slowing so that's a reason for the profit taking."

The blue-chip Dow average and the S&P 500 suffered their steepest one-day percentage declines since late November.

The Dow Jones industrial average dropped 119.21 points, or 0.94 percent, to end at 12,502.56. The Standard & Poor's 500 Index slid 16.23 points, or 1.13 percent, to finish at 1,423.90. The Nasdaq Composite Index fell 32.04 points, or 1.30 percent, to close at 2,434.24.

As a proxy for interest rates, higher bond yields can signal higher borrowing costs for companies. That trend worries stock investors because higher rates can dampen corporate profits.

"Bonds have broken out of the upper end of the recent range in terms of a yield and that's proving a bit alarming," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles. "You've also had the price of oil down $1, which is having a negative effect on a number of energy components in the S&P."

The benchmark 10-year U.S. Treasury note was down 16/32, with the yield at 4.88 percent, the highest intraday level since it struck 4.88 percent in mid-August.

U.S. crude oil for March delivery fell $1.14 to settle at $54.23 a barrel amid profit-taking and ample U.S. oil inventories.

Exxon Mobil Corp. was the top weight on the S&P 500, falling 1.8 percent, or $1.38, to $73.52 on the New York Stock Exchange. Exxon was the second-biggest drag on the Dow.

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