Retail stocks dragged Wall Street lower on Tuesday, a day after it reached a 13-month high, while gains in the U.S. dollar weakened commodity prices and stocks in the materials sector.

Dow component Home Depot Inc , the top U.S. home improvement chain, said it faced a great deal of pressure in the housing and home improvement markets, while Target Corp , the No. 2 discount retailer behind Wal-Mart Stores Inc , said it was cautious about its fourth-quarter performance.

The warnings came as both posted quarterly profits that topped estimates.

Target's shares fell 4.8 percent to $47.87, while Home Depot dropped 4.5 percent to $26.42. The S&P retail index <.RLX> declined as much as 2.8 percent, the largest daily drop since mid-August.

It is hard to continue the big moves (in the stock market) without confirmation the worst in definitely over. People need to see retailers translate outlook into sales, said Janna Sampson, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.

For the retail sector we need to see at least the start of Christmas sales, how does that weekend after Thanksgiving go. We'll get to see if people are actually starting to buy again.

Weak sales ahead of the key holiday season is a negative for a U.S. recovery, as consumer spending accounts for roughly two-thirds of the economy.

The Dow Jones industrial average <.DJI> dropped 16.17 points, or 0.16 percent, to 10,390.79. The Standard & Poor's 500 Index <.SPX> fell 4.21 points, or 0.38 percent, to 1,105.09. The Nasdaq Composite Index <.IXIC> lost 6.13 points, or 0.28 percent, to 2,191.72.

In economic news, U.S. industrial output rose less than expected in October, while wholesale inflation was tame, according to reports that suggested the economy lost some steam after the cash for clunkers program ended.

The U.S. dollar rose against a basket of currencies as risk appetite waned, pressuring oil, gold and other commodities. The dollar index <.DXY> rose 1 percent, its largest daily gain since late September. Stocks and the U.S. dollar have been moving in opposite directions lately.

Commodity-linked stocks eased, with aluminum giant Alcoa Inc off 2 percent to $13.34 and Caterpillar Inc , the world's top maker of mining equipment, down 2.2 percent to $59.09 and weighing on the Dow industrials.

The S&P materials sector <.GSPM> fell 0.5 percent

(Editing by Jeffrey Benkoe)