U.S. producer prices jumped a surprising 1.8 percent last month and industrial output rose firmly, leading to inflation jitters in financial markets.

The data, which came as Federal Reserve officials prepared to open a two-day meeting, pushed down prices for U.S. stocks and government bonds on the view that interest rates could rise faster than many had expected.

The market's worried about what's going to make the Fed put the brakes on and what's going to make the Fed put the brakes on is increasing inflation, said Burt White, managing director at LPL Financial in Boston. Everyone's on inflation watch.

The 30-year Treasury bond, a key gauge of long-term inflation expectations, fell sharply.

The gain in the U.S. producer price index, reported by the Labor Department on Tuesday, reflected a 6.9 percent surge in energy prices. Analysts had expected the PPI to rise just 0.8 percent after a 0.3 percent gain in October.

But even outside the volatile food and energy sectors, prices rose a faster-than-expected 0.5 percent, the most in more than a year, although analysts said spikes in prices for light trucks and tobacco may not prove lasting.

If you look at earlier stages of the production pipeline, (prices) were fairly contained, said Anna Piretti, senior economist at BNP Paribas in New York. I think that the strength of today is unlikely to continue going forward.

Separately, the Fed said U.S. industrial output rose 0.8 percent in November after a holding steady in October as the manufacturing sector extended a recent recovery that economists hope will help turn the country's ailing labor market around.

Recent signs of economic vigor have led many economists to bump up forecasts for fourth-quarter economic growth. Goldman Sachs joined the growing ranks on Tuesday, saying growth would likely come in at a 4 percent annual rate, not the 3 percent pace it had been expecting.

A third report, however, showed a barometer of manufacturing in New York State unexpectedly plummeted in December, indicating the factory sector may have lost a step, while prices paid by manufacturers rose.

I think today's data is pretty consistent with the story we've been telling: This is a gradual, uneven recovery, not the short bounce back we've seen after most postwar recessions, said Zach Pandl, economist at Nomura Securities in New York.

INFLATION WORRY

The Fed cut benchmark interest rates close to zero a year ago to combat a deepening recession and has vowed to hold them exceptionally low for an extended period. The Fed will issue a statement on Wednesday and markets will eye it closely for any sign policy-makers are backing away from that pledge.

It could give ammo to the inflation hawks and prompt (Fed Chairman Ben) Bernanke to pull the trigger on rates, said Dan Cook, senior market analyst at IG Markets in Chicago.

Compared with the same period last year, producer prices were up 2.4 percent in November, posting their first gain in a year and the largest rise since October 2008.

The New York Federal Reserve Bank said its Empire State general business conditions index fell to 2.55 in December from 23.51 in November. This was the biggest monthly decline on record and the lowest reading since July 2009 when it was at minus 0.55.

Economists polled by Reuters had expected a December figure of 24.00. Despite December's sharp fall, the index is still well above a record low reached in March.

The report on producer prices showed the cost of gasoline rose 14.2 percent last month, eclipsing a sharp moderation in food price increases.

Crude oil prices hit $82 a barrel in late October but have since retreated sharply, suggesting energy prices at the producer level will likely retreat. On Tuesday, crude oil was trading around $70 a barrel.

Still, the 0.5 percent rise in prices excluding food and energy, which followed a 0.6 percent fall in October, surprised markets. The core index had been forecast to rise just 0.2 percent in November.

Excluding cars and light trucks, the core index was up 0.2 percent in November. Light motor truck prices, which had depressed core producer prices in October, rose 4.2 percent last month, the largest gain since November 2006.

(Additional reporting by Richard Leong, Ryan Vlastelica, Emily Flitter and Leah Schnurr in New York; Editing by Andrea Ricci)

Inflation