TORONTO - A dismal economic outlook from the U.S. Federal Reserve forecasting slower growth and higher inflation sent stock markets reeling Wednesday, knocking Toronto's key index below 15,000 just a day after crossing that milestone.

High oil prices also heightened inflation worries as crude came within a whisker of the US$134 a barrel mark.

Toronto's S&P/TSX composite index tumbled 256.97 points to 14,790.37.

New York's Dow Jones industrial average fell 227.49 points to 12,601.19 on top of a 199-point drop Tuesday.

"I think the key thing for the market here is that it does further cement the idea that the Fed is on hold (in cutting rates) for the time being," said BMO Nesbitt Burns senior economist Michael Gregory.

"We know that the worst possible scenario for the stock market is stagflation (stagnant growth plus high inflation). And it always likes to know that there's always this rate cut genie ready to be pulled out of the bottle at a moment's notice. Well, as it turns out, this gives further evidence the Fed is on hold. "

Fed officials signalled last month that their one-quarter-point rate reduction, which dropped their key rate to two per cent, might be their last rate cut for some time.

"Most members viewed the decision to reduce interest rates at this meeting as a close call," the Fed's minutes from that meeting revealed.

The TSX Venture Exchange moved 10.62 points higher to 2,671.76 and the Canadian dollar was ahead 0.79 of a cent to 101.62 cents US, its highest close since Feb. 28.

The Nasdaq composite index dropped 43.99 points to 2,448.27 and the S&P 500 moved down 22.69 points to 1,390.71 as the Fed said it now believes gross domestic product will grow between just 0.3 per cent to 1.2 per cent this year. That's lower than a previous Fed forecast, released in late February, that estimated growth to be between 1.3 per cent and 2 per cent.

The Fed minutes released from the April 29-30 meeting indicated that even with the more downbeat outlook, officials would not be inclined to cut interest rates further.

A big reason for that is inflation. The Fed now expects inflation to be between 3.1 per cent and 3.4 per cent this year mainly because of higher energy prices.

That's higher than its old forecast for inflation, which was estimated to come in at around 2.1 per cent to 2.4 per cent.

The TSX financial sector fell 1.6 per cent after Moody's Investors Service said it is "conducting a thorough review" of the possibility that computer errors wrongly assigned top-quality ratings to some debt that later declined in value.

The Financial Times reported Moody's incorrectly gave triple-A ratings to billions of dollars of a debt instruments because of an error in the rating agency's computer models.

"That would create some real carnage in an industry that doesn't need it," said Jim Herrick, manager of equity trading at Baird & Co. in New York, referring to the banks and other financial services companies that have lost billions of dollars due to bad bets on mortgages and other debt.

CIBC (TSX:CM) gave back $1.90 to $71.51 while Royal Bank shed $1.10 to $49.41.

The energy sector was down 1.4 per cent even as the July crude contract on the New York Mercantile Exchange ran ahead $4.19 to US$133.17 a barrel after going as high as US$133.72 after the U.S. Energy Department reported that crude oil inventories fell by more than five million barrels. Analysts had expected a modest increase.

The rise also came on a faltering greenback while OPEC's secretary general declared that "there's no scarcity of oil in the market" because international oil supplies are very high.

In Toronto, EnCana Corp. (TSX:ECA) fell $2.34 to $93.61 and Suncor Energy (TSX:SU) declined $1.39 to $70.98.

Shares in American Airlines parent AMR Corp. tumbled $1.98 or 24 per cent to US$6.22 after the airline said it will cut U.S. capacity by 11 to 12 per cent in the fourth quarter as it grapples with a $3-billion surge in its expected annual jet-fuel costs.

Meanwhile, Air Canada (TSX:AC.B) CEO Montie Brewer warned that rising oil prices have significantly increased the airline's operating costs and customers could see further fare increases. Its shares lost 54 cents to $8.10.

Shares in Talisman Energy Inc. (TSX:TLM) was $1.25 lower to $23.65 after it released details of its new strategy on Tuesday, saying it plans to spend up to $1.3 billion by the end of next year on evaluating unconventional natural gas holdings in North America.

Penn West Energy Trust (TSX:PWT.UN) units were off 13 cents to $34.25 after an agreement to take over Endev Energy Inc. (TSX:ENE) in a units-for-shares deal valuing Endev at $170 million. Endev shares gained 16 cents or 13.45 per cent to $1.35.

Other commodity sectors were weak; the base metals group was down almost three per cent with Teck Cominco Ltd. (TSX:TCK.B) down $2.28 to $49.72 and First Quantum Minerals (TSX:FM) lost $$3.38 to $78.02.

The gold sector eased 0.8 per cent as the June bullion contract in New York climbed $8.40 to US$928.60 an ounce. Barrick Gold Corp. (TSX:ABX) advanced 20 cents to $42.08.

The industrials sector was also a drag with Bombardier Inc. (TSX:BBD.B) down 27 cents to $7.40 after its Bombardier Transportation unit signed a joint venture deal to develop a new line of electric locomotives to be built in Russia.

The Toronto market was also weakened by losses in two of its most heavily-weighted stocks.

Research In Motion Ltd. (TSX:RIM) fell $6.04 to $131.18 while Potash Corp. lost $9.70 to $192.

On the TSX, declines beat advances 949 to 705 with 225 unchanged as 561.8 million shares traded worth $10.4 billion.

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