by Tenzin Pema

NEW YORK - US stocks fell on Monday after McDonald's Corp posted lighter-than-expected May sales and investors worried that the ongoing rise in interest rates could hamper a recovery.

With the market rallying for three months, investors are increasingly looking for more concrete evidence of an improving economy to sustain the advance.

The Dow Jones industrial average dropped 123.41 points, or 1.41 per cent, to 8,639.72. The Standard & Poor's 500 Index fell 12.79 points, or 1.36 per cent, to 927.30. The Nasdaq Composite Index slid 29.68 points, or 1.60 per cent, to 1,819.74.

'Clearly the recovery that the market is pricing in is not here yet ... (it) will have to materialize, otherwise the market is not going to be able to hold on to its gains,' said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

In addition, a continued rise in bond yields could be another headwind for stocks since rising interest rates could boost borrowing costs for consumers and businesses.

The difference between long-dated and short-dated Treasuries has been widening in the past few weeks, and Kenny believes a continuation of that trend could be 'a bit of a shot across the bow for the equity markets'.

In the last two days, the trend has reversed as short-term yields have risen on speculation the US Federal Reserve may raise interest rates.

McDonald's shares were among the top drags on the Dow, falling 2.4 per cent to US$58.44 (S$85.42), after the company said May sales at restaurants open at least 13 months were up 2.8 per cent in the United States, helped by new coffee drinks and snacks.

That was significantly slower than the 6.1 per cent growth in April.

Analysts said that the average of estimates was calling for May growth of around 3.6 per cent.

Other drags were big manufacturers and natural resource companies that have had a strong run-up in recent weeks. Freeport-McMoRan Copper & Gold Inc fell 3.3 per cent to US$55.25,  while 3M Co fell 3 per cent to US$59.18.

Meanwhile, the top drag on the Nasdaq was iPhone and Mac maker Apple Inc, along with other big-cap technology companies such as Google Inc and Microsoft Corp. They were all down about 2 per cent or more.