NEW YORK — A surprisingly dismal report on the country's all-important service sector sent the stock market tumbling Tuesday and suggested to some analysts that the Federal Reserve would keep up its torrid pace of cutting interest rates.
The Dow Jones industrial average skidded more than 370 points after an index designed to give a sense of service-sector activity plummeted to 41.9 in January from 54.4 the previous month. Readings above 50 signify growth in the sector, which accounts for about two-thirds of the U.S. economy. Readings below 50 point to contraction.
Economists had expected a slight easing to 52.5, but the far sharper decline raised the prospect that incipient economic weakness might be deeper and more widespread than previously thought.
"All of a sudden you have a very large portion of the economy not doing well," said Adolfo Laurenti, an economist at Mesirow Financial in Chicago. "The economy is slowing and weakening."
Wall Street was caught flat-footed, and the Dow slumped 370.03 points, or 2.9%, to 12,265.13. The Standard & Poor's 500 index sank 44.18 points, or 3.2%, to 1,336.64.
Asian markets plunged today as investors feared the U.S. economy was sliding into a recession that would sap demand for Asian exports. In Hong Kong, the benchmark index plunged more than 6% in midday trading, while Japan's Nikkei 225 index sank more than 4%.
Shares in Europe also tumbled, with key indexes sinking 2.6% in Britain, 3.4% in Germany and 3.9% in France.
Oil prices slid as traders bet that a slower economy would reduce energy demand. Crude futures declined $1.61 to $88.41 a barrel on the New York Mercantile Exchange.
The report from the Institute for Supply Management bolstered the prevailing expectation among investors that the Fed will cut interest rates by half a point at its next meeting March 18. Trading in interest-rate futures Tuesday indicated a 76% chance of a half-point cut, up from 68% odds Monday. The implied odds of a three-quarters-of-a-point chop were 24%, up from no chance Monday.
Merrill Lynch said the central bank could act before the meeting by making an emergency cut as it did Jan. 22.
Other economists doubted that the Fed would move immediately, especially on of a single report that could prove to be an aberration. But if other data in the next few weeks also indicate a sharply contracting economy, the Fed probably would act, Laurenti said.
"The Fed might wait, but not that long," he said.
The central bank has power-blasted the economy with rate cuts, lowering its benchmark rate to 3% from 5.25% in September. The reductions included two cuts totaling 1.25 percentage points last month.
But the cheaper money has yet to alleviate fears about the economy's near-term outlook or to lift the gloom that has settled over the housing market.
The service-sector report cemented the impression left by other recent indicators, such as of job losses and trouble in manufacturing, that point to an economy in recession or headed that way.
The sharp sell-off dashed hopes created by last week's market rebound that stocks had bottomed out. Instead, some market watchers said, share prices are likely to thrash about in coming weeks until there are clearer signs about the direction of the economy.
"Usually markets don't make V-bottoms," said Charles Blood, director of strategy research at Brown Bros. Harriman & Co. in New York. "They go back and forth."
The deterioration in service industries erased lingering bullishness among some investors who had clung to hope that the economy was stronger than most recent numbers had indicated, said Peter Boockvar, equity strategist at New York brokerage house Miller Tabak & Co. in New York.
The Dow jumped 4.4% last week in anticipation of, and then in reaction to, the Fed's latest rate cut Jan. 30. But Boockvar said such strong advances were normal in declining markets as investors rush in to buy at low points only to see prices fall further.
"You have some violent short-term rallies that make people think the worst is over, but it's just a dead-cat bounce," he said.
The Dow is down 7.5% this year and 13% from its record high set in October. The S&P 500 has fallen 9% year to date and 15% since October. But both indexes are above where they were before last week's rally.
In other market highlights:
* Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange.
* The technology-dominated Nasdaq composite index sank 73.28 points, or 3.1%, to 2,309.57. The Russell 2,000 index of smaller companies fell 21.88 points, or 3%, to 701.58.
* Bond yields slumped as investors sought the safety of government-backed debt. The yield on the benchmark 10-year Treasury note fell to 3.56% from 3.64% late Monday. The dollar rose against other major currencies while gold prices fell.