STOCKS TUMBLE 114 POINTS : JUNE EMPLOYMENT REPORT FUELS FEARS ABOUT INFLATION.

Byline: Patricia Lamiell Associated Press 

Stock prices dropped sharply Friday after a surprisingly strong June jobs report stirred investors' fears about inflation.

The Dow Jones industrial average slumped 114.88 points to 5,588.14, posting its seventh-largest point drop ever and pushing the closing Dow below 5,600 for the first time since May 13.

It was the biggest point drop since the 171-point plunge on March 8, in reaction to the first in a series of government reports of unexpectedly hardy jobs data. Since then, robust employment figures have touched off a series of stock market aftershocks.

But Friday's 2.01 percent decline in Wall Street's best-known indicator was not close to major past retreats. Even with the decline, the Dow still is up more than 9 percent from the start of 1996.

Stocks and bonds reacted Friday to an early morning Labor Department report that the nation's unemployment rate fell to 5.3 percent in June, the lowest level in six years, and that businesses added 239,000 workers to payrolls, a sharply higher figure than had been expected.

The unemployment rate had been 5.6 percent in May. Many analysts had expected it to remain unchanged. Investors fear rapidly rising employment may be a signal that the economy is growing too fast, something that could send inflation higher.

Fears that inflation is heating up might prompt the Federal Reserve to raise interest rates, investors reason. In addition, the expectation is that when the Fed changes course and raises rates, there will be more than one increase.

Although the central bank left rates unchanged at a two-day policy meeting that ended before Thursday's holiday, investors concluded from the June jobs data that central bankers could tighten before the next meeting in August.

``I can't imagine it would be an open question,'' said Barry Berman, head stock trader for Robert W. Baird & Co. in Milwaukee. ``People will probably wonder why the Fed didn't tighten this time.''

Higher rates are bad for stocks. Not only do rising rates make returns more attractive on bonds when compared with stocks, but high rates also curb consumer spending and business investment, threatening corporate profits.

Declining issues swamped advancers by nearly 7 to 1 on the New York Stock Exchange.

Broad market indexes got hammered as well. The NYSE's composite index fell 7.13 to 353.24, and the Standard & Poor's 500-stock index fell 14.96 to 657.44. The Nasdaq composite index fell 23.25 to 1,158.35, and the American Stock Exchange's market value index fell 5.32 to 574.33.

But volume was very light following the July 4 market holiday. When the market closed early at 1 p.m., 181.45 million shares had changed hands on the New York Stock Exchange, compared with 334.57 million in a full session on Wednesday.