NEW YORK (MarketWatch) -- U.S. stocks were under pressure Thursday, after the Philadelphia Federal Reserve's manufacturing survey showed an unexpected negative reading for this month, touching off fears that the economic slowdown is more severe than previously projected.

Shares of Hewlett-Packard Co fell on concerns that Chief Executive Mark Hurd may be more deeply implicated in the company's board leak probe than was previously understood, furthering eroding market sentiment.

The Dow Jones Industrial Average (^DJI - News) fell 64 points to 11,549, well off an earlier high of 11,630.60. Of the Dow industrials' 30 components, 22 contributed to losses. See component performance .

The S&P 500 shed 4 points at 1,320 and the Nasdaq Composite slumped 9 points lower at 2,243.

Volume was relatively light, as more than 1 billion shares changed hands on the New York Stock Exchange, with 18 declining shares for every 13 on the rise. There were 1.33 billion shares traded in the Nasdaq market, with 17 losing stocks for every 11 winners.

Stocks retrenched decisively into negative territory as investors took in news of the Philadelphia Fed's first negative reading since 2003.

The bank's headline index showed a -0.4 reading for September, contrasting with the positive August reading of 18.5. Economists polled by MarketWatch had expected a positive reading of 14.3 for this month.

Fed funds futures contracts now are pricing in a slight chance of a rate decrease by the end of the year.

"Today we are getting a peek at what will happen if we get too slow economic data," said Art Hogan, chief market strategist at Jefferies & Co. "It's trouble to get this data at a time when the market has been moving significantly higher. So this is a wake-up call."

On Wednesday, the S&P 500 Index reached a fresh 5 1/2-year high in intraday trading, but it just missed closing at a multi-year high by a fraction of a point. See Market Snapshot and full Fed story .

"This is a pause. The market has had a pretty good run-up," said Paul Nolte, director of investments at Hinsdale Associates.

"Normally, the Fed makes its comments [of the afternoon of a monetary decision] and the market makes its move into the close," he said. "Often the next day, the market reverses that move."

Philip Roth, chief technical market analyst at Miller Tabak & Co., said he remains cautious over the near-term outlook for the major averages, noting that the number of new highs for individual stocks is well below earlier peaks. In addition, volume is on the light side.

At the same time, he's optimistic about the possibility of new highs for the indexes over the medium term.

Also on the data front, first-time claims for state unemployment benefits rose in the latest week by 7,000 to stand at 318,000, the Labor Department said.

This was above the average economist estimate compiled by MarketWatch of 312,000. Continuing claims fell by 29,000 to 2.46 million. See Economic Report .

Separately, the Conference Board's leading economic indicator report suggested moderate growth for the remainder of the year.

The index of leading economic indicators fell 0.2% in August for the second straight month.

The recent decline in gasoline prices should offset some of the drag from "the sharp cooling" seen in the housing market, said Ken Goldstein, labor economist for the group. With profits slowing, "all this suggests the economy is going to remain slow."

Other markets

The U.S. dollar fell further against its major counterparts, after the Philadelphia Fed survey showed regional manufacturing to be unexpectedly weak. The dollar fell 0.6% against the yen to 116.61, while the euro rose 0.6% to $1.2770.

Treasurys rallied further after the Philadelphia Fed report.

The benchmark 10-year note last rose 20/32 to 101-23/32 with a yield (CBOE:^TNX - News) of 4.660%, the lowest yield seen in six months.

Crude-oil futures gained back some of their prior day's loss, which put the October contract near a one-year low at the close. The November contract, which became the front-month contract Thursday, was last up 55 cents at $61.29 a barrel. See Futures Movers .

October natural-gas futures dropped to its lowest in more than two years, falling 23.2 cents, or 4.6%, to $4.704 per million British thermal units. Earlier new data showed that the nation's supplies of gas in storage rose in the latest week.

December gold futures turned higher after the dollar weakened further, with the benchmark contract last was up $2.10 at $588.30 an ounce. Some metals traders view the latest Fed policy statement issued Wednesday as a signal that more rate increases may be in store.

Stocks in action

By sector, the day's selling was taking a toll on such varied roups as real estate (DJR - News) , hardware (GHA - News) and biotechnology (NBI - News) . There were a few winners in the energy sector, including oil (XOI - News) and natural gas (XNG - News) .

General Mills (NYSE:GIS - News) reported fiscal first-quarter earnings and revenue that rose above year-earlier levels and Wall Street expectations, and the packaged-food maker reaffirmed its fiscal 2007 outlook.

The stock advanced 3.4%.

Package-delivery service FedEx Corp. (NYSE:FDX - News) also reported first-quarter results that rose above forecasts. The company lifted its earnings outlook as well, but said costs from a proposed new contract with its pilots' union would reduce second-quarter earnings.

The stock was off 1.4% at $106.06.

Dow component Hewlett-Packard (NYSE:HPQ - News) fell 4.9% to $34.99. On Friday, the company will hold a press briefing at which CEO Hurd will address the company's investigation of leaks from its boardroom.

The Wall Street Journal online edition reported that e-mails suggest that Hurd was more closely involved in the leak than was previously believed.

The probe, which includes a review of the practice of "pretexting" to obtain the phone records of directors and journalists, has already led the company to announce plans for Patricia Dunn to leave the post of chairwoman in January.

Elsewhere, shares of drug retailers were knocked lower after Dow member Wal-Mart (NYSE:WMT - News) said it would sell nearly 300 generic drugs at $4 per prescription beginning in Florida this week and spreading to as many states as possible in 2007.

Shares of CVS Corp. (NYSE:CVS - News) slumped more than 8%, Rite Aid Corp. (NYSE:RAD - News) dropped nearly 7% and Walgreen Co. (NYSE:WAG - News) lost nearly 7%.

Tribune Co. (NYSE:TRB - News) stock ran up 5.3%, benefiting from media reports that the embattled media concern may consider going private.