NEW YORK (Reuters) - Stocks dropped on Wednesday as rising yields on U.S. government debt fueled concern that businesses and consumers could face higher borrowing costs, which could hamper an economic recovery.

Traders work on the options trading floor at the New York Stock Exchange, May 26, 2009. REUTERS/Brendan McDermid

The decline was broad-based, with manufacturer 3M Co MMM.N and International Business Machines Corp IBM.N among stocks leading a 2 percent fall on the blue-chip Dow.

The S&P and Nasdaq lost more than 1 percent each.

“Yields are rising to levels that are becoming very worrisome for the economic outlook,” said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.

Bond prices declined in afternoon trading, causing their yields to rise, as concerns about the heavy supply of debt weighed on the market despite a well-received auction of new five-year notes. The yield on U.S. Treasuries is a key benchmark for many lending rates.

The Dow Jones industrial average .DJI fell 173.47 points, or 2.05 percent, to end at 8,300.02. The Standard & Poor's 500 Index .SPX was down 17.27 points, or 1.90 percent, at 893.06. The Nasdaq Composite Index .IXIC was down 19.35 points, or 1.11 percent, at 1,731.08.

The stock market losses follow gains of more than 2 percent in each of the major indexes on Tuesday, when data on consumer confidence stoked optimism about an economy recovery.

Wednesday’s sell-off in stocks and bonds also surprised some investors as the two tend to move in opposite directions. Treasuries prices typically fall when investors’ appetite for riskier assets, such as stocks, increases.

The price of benchmark 10-year notes was down over 1-16/32 and yielding 3.74 percent on Wednesday, up nearly 20 basis points in just one day and over 1.25 percentage points in just six weeks.

Shares of 3M fell 3.2 percent at $56.04, while shares of IBM lost 2 percent at $102.93, both on the New York Stock Exchange.

Also on the NYSE, shares of General Motors Corp GM.N tumbled 20.1 percent to $1.15 as the automaker faced a failed debt exchange, setting the stage for a bankruptcy filing expected by the end of the month.

Semiconductor stocks had kept the Nasdaq in positive territory for much of the day after SanDisk Corp SNDK.O renewed a chip license with Samsung Electronics 005930.KS. Shares of SanDisk rose 14.3 percent to $15.52.

Trading was moderate on the NYSE, with about 1.33 billion shares changing hands, below last year’s estimated daily average of 1.49 billion, while on Nasdaq, about 2.17 billion shares traded, below last year’s daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on the NYSE by 7 to 3, while decliners beat advancers on the Nasdaq by about 2 to 1.