The American stock market plunged, pushing the Standard & Poor’s 500 Index and Dow Jones Industrial Average down the most in three months, after a jump in bond yields fueled speculation the Federal Reserve will raise interest rates.

Banks and brokerage firms led by Citigroup Inc., Goldman Sachs Group Inc., and Merrill Lynch & Co. pushed stocks to a third day of declines. All 16 homebuilders in S&P’s indexes dropped on concern that demand for mortgages will diminish. Wal-Mart Stores Inc., Macy’s Inc., and J.C. Penney Co. retreated after May sales trailed estimates.

This week’s slump ended three months of gains that sent the S&P 500 to a record. Higher interest rates may lower profits, make takeovers more expensive, and reduce the appeal of dividends.

“We’re going through an interest rate reality check,” the chairman of Awad Asset Management, James Awad, said. “That’s breaking the momentum of the market.”

The S&P 500 fell 26.66, or 1.8%, to 1490.72. The Dow average plummeted 198.94, or 1.5%, to 13,266.73 as all 30 of its members fell. The Nasdaq Composite Index lost 45.80, or 1.8%, to 2541.38. Indexes extended their declines after oil prices climbed to a nine-month high.

Benchmark 10-year note yields increased to 5.13%. Bond yields are increasing worldwide on signs global growth will accelerate. Pacific Investment Management Co.’s Bill Gross, manager of the world’s largest bond fund, reiterated his forecast that 10-year yields may climb as high as 6.5% between now and 2011. Options on the fed funds rate show that as of yesterday, the odds of an increase to 5.50% are at almost 41%. A month earlier, the odds were zero.

“Treasuries have now reached a point where they are starting to represent good value,” the chief investment officer at Third Wave Global Investors, Larry Smith. “The stock market is going to get a little bit spooked.”