It was the first triple-digit loss for the Dow since March.
"This has to be seen in the context of how high the Dow has gotten," said Art Hogan, chief market strategist at Jefferies & Co. The Dow industrials reached another record high on Wednesday. The Dow earlier in the week pierced the 13,300 level for the first time.
Some investors are likely to question whether the weaker sales reflect a slowing economy and low consumer confidence amid a falling housing market and high energy prices.
News that the trade deficit widened sharply in March, after improving over the past six months, also added to the pressure. The deficit could lead to a downward revision of first-quarter growth to below 1%.
The Dow Jones Industrial Average ended down 147.74 points at 13,215.13, recovering somewhat from a 140 point drop earlier. Big declines were posted by shares of Alcoa Inc. , Dupont and Caterpillar Inc. .
"The market had been going up regardless of news but now investors are starting to look at company by company" and are "focusing on economic data and energy prices," Hogan said.
Among blue chips, Wal-Mart only fell 0.4%, even after the giant retailer said its April sales fell 3.5%, while analysts expected a 1.1% drop.
Overall, Thomson Financial was forecasting that April same-store sales would rise 0.4% compared with 6.5% in the same period last year. But out of 51 retailers that have reported, 85% of them missed expectations, and overall sales marked a 1.8% decrease.
The long list of other retailers that missed forecasts for April sales include Gap , J.C. Penney , Federated , AnnTaylor Stores , Nordstrom , Pacific Sunwear , New York & Co. , Limited Brands , and Abercrombie & Fitch .
The S&P 500 fell 21.11 points to 1,491.47, while the Nasdaq Composite fell 42.60 points to 2,533.74.
Trading volume showed 1.538 billion exchanging hands on the New York Stock Exchange and 2.250 billion on the Nasdaq stock exchange. Declining issues outpaced gainers by 25 to 7 on the NYSE and by 23 to 6 on the Nasdaq.
By sector, banks and biotechnology led the declines.
Gold stocks came under heavy pressure as gold futures slid $15.50, or 2.3%, to close at $667 an ounce. Among the worst decliners were Rangold Resources , Harmony Gold and Freeport McMoRan Copper & Gold .
Economy back in focus?
After putting signs of a slowdown on the backburner during the first-quarter earnings season, investors may be paying renewed attention to the economy .
On Wednesday, the Federal Reserve left interest rates unchanged and referred to the slowing economy in its accompanying statement, even as it said inflation remained its number one concern.
But news that the U.S. trade deficit widened sharply in March could revive economic concerns. The deficit could lead to a downward revision of the already low first-quarter gross domestic product to below 1%, according to Action Economics.
While a fast-falling housing market has already hit economic growth, bullish investors and economists have relied on sturdy employment trends to sustain consumption, the main driver of the U.S. economy.
But a weak April jobs report -- and now weak retail sales -- if sustained in coming months, risks leading the U.S. economy to a hard landing.
Treasury bonds rose following the weak deficit. The benchmark 10-year Treasury bond closed up 5/32 at 98 24/32, yielding 4.647%.
The Bank of England hiked interest rates for the fourth time since August, while the European Central Bank kept interest rates unchanged, while hinting at a June hike.
The dollar rose against major rivals, een after the deficit numbers, following a drop in weekly U.S. jobless claims.
Crude oil futures rose 60 cents to close at $62.15 a barrel, amid gasoline supply concerns.
Among other Dow components, Merck fell 1.9% after an editorial in the New England Journal of Medicine recommended a cautious approach toward Merck's cervical cancer vaccine, Gardasil.
American International Group closed up 0.3% ahead of reporting earnings after the close.
Whole Foods tumbled almost 10% after reporting a profit decline and slowing same-store sales growth.
The Gap dropped 0.8% after reporting weaker than expected April sales.
Rio Tinto fell 5.2% after Wednesday's rally from hopes that BHP Billiton will buy it, as the stock cooled in London and Sydney trade on Thursday.
By Nick Godt