Wall Street economists had forecast a 0.2 percent gain in both overall and core producer prices and the higher-than-expected figures hit markets hard.
US government bond prices plunged and stock futures turned negative, while the dollar strengthened as the report bolstered expectations the Federal Reserve will keep raising interest rates well into 2005.
"It is going to make people more concerned and make people think at this point that the Fed is going to be more aggressive," said Robert MacIntosh, chief economist at Eaton Vance Management in Boston.
Energy prices tumbled 1 percent, building on a sharp fall in December, and food costs slipped 0.2 percent.
However, prices received for cigarettes jumped 3.4 percent, the biggest gain since April 2002. A department analyst said that rise may have partly reflected a shift in the cost of maintaining a farmer's minimum guaranteed price for tobacco over to industry from government.
Auto costs, which had dropped in December, rose 1.2 percent, while prices of light trucks and SUVs climbed 0.9 percent. Vehicle prices have been volatile due to on-again, off-again sales incentives from automakers.
Those two factors - vehicles and cigarettes - went only a bit of the way in explaining the jump in core prices.
A department analyst said the core rate still would have advanced 0.8 percent with car and light truck costs stripped out. Similarly, he said the core index excluding cigarettes would still have been up 0.7 percent.