NEW YORK - Stocks retreated yesterday on more signs of economic weakness and executive shake-ups at two major banks - reminders of the fallout from the credit crisis.

Two key reports indicated that the economy was still struggling. As expected, the Institute for Supply Management's manufacturing index for May showed its fourth straight monthly decline, while the Commerce Department said construction spending dipped in April for the sixth time in seven months due to a drop in home-building.

Nor did the market draw comfort from the financial sector. As the financial system contends with the aftermath of the nation's prolonged credit problems, Wachovia Corp. chief executive officer G. Kennedy Thompson was forced out yesterday, and Washington Mutual Inc. is taking the chairman role away from CEO Kerry Killinger.

In addition, the ratings agency Standard & Poor's Corp. downgraded Merrill Lynch & Co. Inc., Morgan Stanley and Lehman Bros. Holdings Inc. and revised Banc of America Corp. and JPMorgan Chase & Co.'s outlooks to negative.

S&P's review of the financial sector suggested there could be more write-downs coming, though likely not as large as in recent quarters, and "further sharp deterioration" in mortgage-loan portfolios and residential construction.

Brian Gendreau, investment strategist for ING Investment Management, said the markets have been "hypersensitive about anything to do with credit" in recent months, and the combination of the S&P cuts, the bank news, and comments in an overseas speech by U.S. Treasury Secretary Henry M. Paulson Jr. weighed on the market.

"Basically, he suggested that there were further problems to come in the banking and financial sector," Gendreau said. "That's just toxic for stocks."

The retreat follows a pattern in the last month where investors, looking to ignite a rally, quickly back-pedal with any hint of bad economic or corporate news. One such spoiler has been the record pace of oil prices. After slipping last week, light, sweet crude for July delivery rose 41 cents to settle at $127.76 a barrel on the New York Mercantile Exchange.

The Dow Jones industrial average fell 134.50, or 1.06 percent, to 12,503.82, after gaining last week on better-than-expected economic data and a pullback in oil prices. Broader stock indicators also dropped yesterday. The S&P 500 index fell 14.71, or 1.05 percent, to 1,385.67. The Nasdaq composite index fell 31.13, or 1.23 percent, to 2,491.53.

Paulson, during a speech in Abu Dhabi, said there were no "quick remedies" for rising energy prices, which he attributed to high demand and limited supplies. Paulson also said that the housing and capital markets were working through their issues, but that he expected the process to continue "for some time."

In its manufacturing data yesterday, the ISM said commodity prices for the manufacturing sector rose at a faster rate last month than in April.

After announcing its CEO's departure, Wachovia shares closed down 40 cents at $23.40 after earlier falling to $22.72. Washington Mutual fell 2 cents to $9.00.

Lehman fell $2.98, or 8.1 percent, to $33.83. Morgan Stanley lost $1.13, or 2.6 percent, to $43.10, and Merrill fell $1.30, or 3 percent, to $42.62.

And weighing on the Nasdaq, shares of ImClone Systems Inc. fell $2.64, or 6.1 percent, to $40.94 on disappointment over trial data for its drug Erbitux as a treatment for lung cancer and colorectal cancer.