Stocks retreated on Wednesday as technology shares fell after news IBM is planning layoffs and a disappointing Treasury note auction raised concerns of flagging foreign interest in U.S. government debt, which could bode poorly for the economy.

The news overshadowed an early rally after unexpected increases in home sales and orders for durable goods fueled hopes the economic downturn may have found a bottom.

Data suggested weak demand for the Treasury's $34 billion auction of new five-year securities and U.S. bonds extended declines, while Britain saw its first failed government debt auction since 2002.

Our auction didn't go as smoothly as the last one did, so that's basically telling people maybe it's the start of China and Japan not as interested in our bonds as they were. said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams, in New York.

If China in the future doesn't want U.S. government bonds, that would be very, very bad for our economy, especially since with Obama's new budget he needs trillions of dollars, Rovelli said.

The Dow Jones industrial average <.DJI> dropped 56.55 points, or 0.74 percent, to 7,603.42. The Standard & Poor's 500 Index <.SPX> fell 8.38 points, or 1.04 percent, to 797.74. The Nasdaq Composite Index <.IXIC> dropped 16.68 points, or 1.10 percent, to 1,499.84.

International Business Machines was the Dow's biggest drag, leading technology stocks lower after a report that it is planning to lay off workers in its services unit, considered a strength area for the company. The stock fell 1.7 percent to $96.76.

A benchmark index for semiconductor stocks <.SOXX> was down 0.83 percent.

(Editing by Leslie Adler)

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