NEW YORK (MarketWatch) -- A late burst of selling left stocks with a hefty loss Thursday as traders took cash off the table at the end of a banner year, highlighted by the biggest annual percentage gain in the Dow Jones Industrial Average in six years.

The Dow DJIA, +1.19% ended near its intraday low, down 120.46 points, or 1.1%, at 10428.05. The blue-chip measure ended 2009 with an 18.8% gain, though it is still down 26.4% from its all-time record set in October 2007.

The selling was set off by interest-rate jitters but gathered momentum in the last half-hour of trading, which had been thin throughout the day. The lack of participation allowed a relative few participants to have an outsized influence at day's end, apparently through the use of automated trading programs, traders said.

"There's just no liquidity out there right now; guys have totally backed off," said Don Bright, a partner at the Chicago proprietary trading firm Bright Trading. "That makes it easier for a few people to push the market around."

In the day's most closely watched economic announcement, the Labor Department said that weekly jobless claims fell by 22,000 to their lowest level in 18 months. Economists had expected a rise of about 3,000. Visit MarketWatch's Economy and Politics home page.

The report reinforced Wall Street's belief that a U.S. economic recovery is taking hold, but it also spurred some speculation about when the Federal Reserve might raise its key rate target to prevent inflation. That Catch-22 is likely to remain a key consideration for traders well into 2010.

"People are looking at these claims numbers and thinking that maybe the [monthly] payroll numbers due out next week might show an increase in jobs," said Peter Cardillio, chief market economist at Avalon Partners in New York.

If that happens, it would snap a streak of 23 consecutive declines in U.S. employment and perhaps clear an important hurdle for the Fed, which is bound by its charter to encourage both price stability and maximum employment.

Earlier this month, the report of an unexpected drop in the U.S. unemployment rate to 10% stoked fears that a rise in interest rates was coming sooner than had been expected. The fears ebbed after the Fed reaffirmed its plans to keep to its easy-money stance for some time, but Thursday's better-than-expected claims report has brought the interest-rate worries back.

Nevertheless, Karl Mills, chief investment officer at Jurika, Mills & Kiefer, was pleased with Thursday's report.

"It's a trend in the right direction," he said. "You have to have a strong economy to have a strong market, so we look at it as a positive on an otherwise quiet and nonrepresentative day."

Other stock indicators fell Thursday amid scant volume. The Nasdaq Composite Index COMP, +0.74% fell 1% to 2,269.15, up 43.9% on the year. The Russell 2000 RUT, +0.19% was down 1.3% to 625.39, up 25.2% on the year.

The Standard & Poor's 500 index SPX, +0.82% was off 1% to 1,115.10, up 23.5% on the year. The broad index was hurt Thursday by declines in every sector, led by pullbacks of more than 1% each in technology, industrials, materials, utilities, consumer staples, and health care.

Investors digested reports that the U.S. Treasury this week officially ended the bank recapitalization portion of its Troubled Asset Relief Program, the massive bailout launched at the height of the financial crisis to prevent a wider meltdown.

The Treasury this week provided a combined $29.26 million in capital to 10 small banks across the country, it said in a report released Thursday. A Treasury spokesman said the banks would be the last to receive capital under the effort, dubbed the Capital Purchase Program. Through the program, launched in October 2008, the Treasury has provided 707 U.S. banks with $204.9 billion in capital.

Composite turnover in New York Stock Exchange-listed companies hit 2.3 billion shares, a new full-day low for the year. Decliners outnumbered advancers by more than two to one.

Thursday marks the end of what has been the worst calendar decade for stocks since the 1820s, when reliable stock-market records began, according to data compiled by Yale University finance professor William Goetzmann. Get more details in Market Pulse.

However, the rally from the stock market's 12-year low in March represents the strongest rebound since 1933. The Dow has risen 61% over that span.

Meanwhile, Treasurys have handed investors a loss of 3.30% through Wednesday in 2009, on pace for the second-worst annual return since at least 1973, according to the latest data from Barclays Capital. In 1994, Treasurys posted a loss of 3.38%. In 2008, the government bond market saw hefty returns of 14%.

In recent action Treasury prices slipped. The benchmark 10-year note was off 11/32 to yield 3.837%. See Bond Report.

The dollar strengthened against the euro and Japanese yen. Crude-oil futures and gold futures were higher.