New concerns about inflation from the Federal Reserve drove stocks sharply lower yesterday, adding to a spate of profit-taking that erased nearly a month of Wall Street’s gains in the first two sessions of 2005.

According to the minutes of the Federal Open Market Committee’s December 14 meeting, a number of Fed officials said a drop in productivity growth, a weakening dollar, and high oil prices could all contribute to inflation, and they hinted that interest rates may have to rise more aggressively to strengthen the dollar and curb inflation.

The Fed had been promising steady, measured hikes in rates; the benchmark federal funds rate stands at 2.25% following the Fed’s quarter percentage point increase in December.

The release of the minutes led to a sharp drop in stock prices and a jump in trading volume, exacerbating losses in a session in which investors sold small cap stocks and riskier investments for a second straight day.

“The Fed’s comments really turned a day of light profit-taking into a day of significant profit-taking,” said the chief market strategist at Spencer Clarke LLC, Michael Sheldon. “Clearly, the way the market started off the new year will make investors nervous, and that could feed on itself over the next few days and drive things even lower before it settles down.”

The Dow Jones industrial average fell 98.65, or 0.92%, to 10,630.78.

Broader stock indicators fell sharply. The Standard & Poor’s 500 index lost 14.03, or 1.17%, to 1,188.05, and the Nasdaq composite index tumbled 44.29, or 2.06%, to 2,107.86, posting its biggest one-day decline since August 6.

The losses over the last two days erased substantial gains from the last month, with the Dow and the S&P reaching their lowest levels since the second week of December and the Nasdaq falling to its lowest close since November 30.

The selling was intensified by climbing oil prices, with tight supplies of heating oil and evidence that Saudi Arabia was cutting back on production blamed for the increase. A barrel of light crude settled at $43.91, up $1.79, on the New York Mercantile Exchange.

Analysts were hesitant to call the last two days of selling a reversal of the November and December rally, noting that Friday’s job-creation report from the Labor Department and the start of fourth quarter earnings season next week could give stocks a boost and extend Wall Street’s post election rally. However, a shortfall in new jobs or disappointing earnings could do the opposite.

“The economy does seem to be either accelerating or at least maintaining a steady pace, which is a good sign that this rally could continue,” said Ken Tower, chief market strategist for Schwab’s CyberTrader. “It would be very odd for a rally that strong to just roll over and die. Dramatic reversals are unusual. But we’ll just have to wait and see.”

Declining issues outnumbered advancers by about 11 to 3 on the New York Stock Exchange, where preliminary consolidated volume came to 2.17 billion shares, compared with 1.93 billion on Monday.

The Russell 2000 index of smaller companies was down 11.89, or 1.86%, at 628.55, its lowest level since Dec. 7.

Overseas, Japan’s Nikkei stock average rose 0.25%. In Europe, Britain’s FTSE 100 closed up 0.68%, France’s CAC-40 climbed 0.2% for the session, and Germany’s DAX index slipped 0.02%.