US STOCKS-Wall St drops as rate angst spurs profit-taking

                                

 * Hoenig: Keeping rates too low fosters risky behavior
 * Energy shares fall with oil prices
 * Treasury's 10-yr note auction gets strong demand
 * Dow off 0.7 pct; S&P off 0.6 pct; Nasdaq off 0.2 pct
                                
* For up-to-the-minute market news, click [STXNEWS/US]
 (Adds details on U.S. stock fund outflows, Palm shares' brisk
rally and volume figures)
                                
 By Leah Schnurr
                                
 NEW YORK, April 7 (Reuters) - U.S. stocks fell in a broad
late-day drop on Wednesday after a top Federal Reserve
official said interest rates should not stay low for much
longer, giving investors an excuse to take profits.
                                
 A speech by Kansas City Federal Reserve Bank President
Thomas Hoenig drove afternoon selling after he said keeping
interest rates too low for too long would encourage risky
financial behavior. For details, see [ID:nN07126274]
                                
 Energy stocks led the declines, with the S&P energy index
<.GSPE> falling 1 percent, and Dow component Exxon Mobil
<XOM.N> sliding 0.8 percent to $67.34. Crude oil futures
<CLc1> fell 1.1 percent to $85.88 a barrel after data showed
domestic inventories rose last week.
                                
 The Federal Reserve's near-zero interest-rate policy has
underpinned a rally of almost 75 percent since the March 9,
2009, low, and the removal of easy money is one of the
market's biggest fears. Hoenig, however, was the sole
dissenter at the most recent Fed meeting, advocating higher
rates.
                                
 "It looks like what the market is latching onto is Thomas
Hoenig -- the lone dissenter of the idea of not raising rates
-- had some very strong comments," said Scott Marcouiller,
senior equity market strategist at Wells Fargo Advisors in St.
Louis.
                                
 "The real reason is it's a short-term extended market
that's vulnerable to short-term pullbacks and this is what
it's using as the excuse."
                                
 The Dow Jones industrial average <.DJI> fell 72.47 points,
or 0.66 percent, to 10,897.52. The Standard & Poor's 500 Index
<.SPX> slipped 6.99 points, or 0.59 percent, to 1,182.45. The
Nasdaq Composite Index <.IXIC> lost 5.65 points, or 0.23
percent, to 2,431.16.
                                
 In contrast, Federal Reserve Chairman Ben Bernanke said
the U.S. economy still faces significant headwinds, suggesting
he was in no rush to raise interest rates. [ID:nWEQ003857]
                                
 The CBOE Volatility Index <.VIX>, Wall Street's fear
gauge, gained 2.4 percent after closing on Tuesday at a
two-and-a-half-year low. Despite the gain, the VIX remains at
low levels, suggesting a complacency among investors.
                                
 Data from the Investment Company Institute showed  
domestic equity funds had outflows of $64 million for the week
ending March 31, the second consecutive week of outflows.
Domestic equity funds have experienced outflows in six of the
last eight months, suggesting investors remain cautious.
                                
 The KBW index of bank stocks <.BKX> slipped 0.4 percent,
with JP Morgan Chase & Co <JPM.N> down 1.1 percent at $45.32.
Wells Fargo & Co shares slid 0.9 percent to $31.99.
                                
 Monsanto Co <MON.N> fell 2.1 percent to $68.09 after the
agricultural seed company reported a quarterly profit below
expectations and warned it will not meet its 2010 earnings
goal. [ID:nN07103590]
                                
 Shares of Palm Inc <PALM.O> saw the biggest volume on the
Nasdaq, with 83.1 million shares changing hands. The stock
spiked 20 percent to $4.62 on speculation the smartphone maker
may be an acquisition target. [ID:nN07121914]
                                
 Stocks gained some ground in the early afternoon after
strong demand at a $21 billion Treasury auction of 10-year
notes, but the momentum was short-lived.
                                
 Markets still face a $13 billion 30-year bond sale
Thursday, which may prove a bigger hurdle.
                                
 Worries about Greece's debt load created a negative
overhang early on after the government said the country's
banks had asked for billions of euros in support and euro-zone
states argued over the conditions of potential bailout loans.
[ID:nLDE636138]
                                
 About 9.63 billion shares traded on the New York Stock
Exchange, the American Stock Exchange and Nasdaq, in line with
last year's estimated daily average of 9.65 billion.
                                
 Declining stocks outnumbered advancing ones on the NYSE by
a ratio of about 2 to 1, while on the Nasdaq, nearly five
stocks fell for every four that rose.
 (Reporting by Leah Schnurr; Editing by Jan Paschal)