Stocks drop sharply in early trading

Stock prices fell hard this morning after a report showed a large drop in the all-important service sector, raising concerns that another key leg of the economy may be giving way.

The Dow Jones industrial average skidded more than 200 points after an index that measures service-sector activity plummeted to 41.9 in January from 54.4 the previous month. Readings above 50 signify growth, while those below 50 point to contraction.

Economists had expected a slight drop-off to 52.5, and the far-sharper decline caught Wall Street off-guard.

“This was a total and complete surprise,” said Charles Blood, director of strategy research at Brown Bros. Harriman & Co. in New York. “This is a big deal.”

At 10:30 a.m. Eastern time, the Dow was off 206.15, or 1.6%, to 12,429.01. The Standard & Poor’s 500 index sank 23.67 points, or 1.7%, to 1,357.15.

Financial and retail stocks led the way down. Foreign markets dropped in overnight trading.

Treasury bonds rallied as investors once again sought refuge from the economic clouds.

The Dow repeatedly bounced above and below the 200-point mark, a mildly encouraging sign that investors were trying to follow through on last week’s rally to buy stocks at perceived low points, Blood said.

walter.hamilton@latimes.com