NEW YORK — Stocks posted their sharpest loss yesterday in almost three months after the biggest jump in the unemployment rate since 1986 and a near $11-a-barrel rise in oil prices heightened concern that the economy will sink into a recession.

General Electric Co. and JPMorgan Chase & Co. led the retreat after the Labor Department said the jobless rate increased to 5.5 percent in May, higher than every forecast in a Bloomberg News survey. Washington Mutual Inc. tumbled, sending the Standard & Poor's 500 Banks Index to the lowest level in 11 years, on renewed speculation consumer defaults will grow. J.C. Penney Co., General Motors Corp. and Continental Airlines Inc. dropped as Morgan Stanley predicted crude may climb to $150 within a month.

The S&P 500 Index lost 43.37, or 3.09 percent, to 1,36.068. The Dow Jones Industrial Average dropped 394.64, or 3.13 percent, to 12,209.81. The Nasdaq Composite Index sank 75.38 to 2,474.56. Five stocks dropped for each that rose on the New York Stock Exchange.

"The writing is on the wall that we're in for a softer labor market, which is going to bode negatively for the consumer," said Greg Woodard, a portfolio strategist at Manning & Napier, which manages $18 billion in Fairport, New York. "You have to position a portfolio for below-trend growth in the U.S."

Every industry in the S&P 500 retreated except for energy producers as a weakening job market added to concern that consumers buffeted by falling home values and higher fuel costs will pull back spending.

The S&P 500 had rebounded 10 percent through yesterday from a 19-month low in March as better-than-forecast reports on gross domestic product, inflation and manufacturing spurred speculation the economy will avoid a recession. Yesterday's retreat erased a rally Thursday sparked by an unexpected decrease in weekly jobless claims and sales at Wal-Mart Stores Inc. and Costco Wholesale Corp. that topped analysts' estimates.

Economists predicted the jobless rate would rise to 5.1 percent from 5 percent in April, according to the median of 79 forecasts in a Bloomberg survey. The Labor Department said payrolls fell by 49,000 in May after a revised drop of 28,000 drop in April, a net decrease that was in line with economists' forecasts.

The Morgan Stanley Cyclical Index, a gauge of companies that rely the most on economic expansion to boost profits, dropped 3 percent as 28 of 30 shares in the group retreated. The Dow Jones Transportation Average, created by Wall Street Journal co-founder Charles Dow in 1884 to foretell economic trends, lost 3.9 percent.

GE, which relies on economic growth to increase earnings at its businesses ranging from jet engines to locomotives and turbines for power plants, declined 90 cents to $30.16. Citigroup, which got about 39 percent of its 2007 revenue from its U.S. consumer business, lost $1 to $20.22.

"The recovery for the U.S. economy will be a protracted affair," Jack Malvey, the New York-based chief global fixed- income strategist at Lehman Brothers Holdings Inc., said in an interview on Bloomberg Radio. "We're in a new phase here where there's questions about the real fundamentals of a variety of industries including financials."

Washington Mutual, the Seattle-based lender that has lost more than 80 percent of its market value in the past year, declined $1.08 to $7.53.

AIG, the world's largest insurer, dropped $2.48 to $33.93. The SEC is examining how the New York-based company accounted for credit-default swaps, contracts conceived to protect bondholders against default, including those backed by subprime mortgages.

Officials at the Justice Department have asked the SEC for information, meaning a criminal investigation may follow, the Journal reported, citing unidentified people with knowledge of the matter. Chris Winans, an AIG spokesman, declined to comment on the Journal report.

Crude oil for July delivery surged 7.5 percent to $138.54 a barrel in New York as demand grew for a hedge against a weakening dollar and Morgan Stanley said prices may reach $150 within a month because of accelerating Asian consumption. Energy producers accounted for 27 of the 40 companies in the S&P 500 that posted gains yesterday as the jump in crude, gasoline and natural gas prices boosted the outlook for profits.