Wall St starts year on sour note

US stocks sank on Wednesday, with the Dow getting off to its worst-ever start to a year, after data showed a surprise contraction in manufacturing and oil surged to $US100 a barrel, raising the spectre of stagflation.

A broad range of sectors sensitive to energy costs and business cycles suffered on the day, contributing to the Dow's 220-point plunge and steep declines in the S&P 500 and the Nasdaq. United Airlines parent UAL Corp led transport stocks lower, falling more than 10 per cent on the jump in oil prices, while Intel Corp dropped 5 per cent after Bank of America downgraded the semiconductor group on growth concerns.

Any hope for a New Year's rally was dashed early in the session after the Institute for Supply Management reported that factory activity shrank unexpectedly in December.

The ISM data poses a quandary for the Federal Reserve, which must cope with rising prices while trying to stave off recession. Major manufacturers fell hard on the report. US Steel shares dropped 6 per cent to $US113.64, and Textron, the maker of Cessna corporate jets and Bell helicopters, fell 6.3 per cent to $US66.81.

"A likely scenario is stagflation. That's the worst of all worlds. You can't lower rates without stimulating inflation pressures and you can't raise rates because the economy is stalled," said Hugh Moore, partner with Guerite Advisors in Greenville, South Carolina.

"The Fed is trying to keep options open, but they really have limited flexibility."

The Dow Jones industrial average was down 220.86 points, or 1.67 per cent, at 13,043.96. The Standard and Poor's 500 Index was down 21.20 points, or 1.44 per cent, at 1447.16. The Nasdaq Composite Index was down 42.65 points, or 1.61 per cent, at 2609.63.

Courtesy: The Australian Business