WASHINGTON (Reuters) - U.S. wholesale prices posted their biggest drop on record last month as energy prices plunged and the costs of cars, light trucks and cigarettes fell, the government said on Thursday in a report that showed prices falling much more than Wall Street expected.

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The producer price index, which measures prices paid at the factory, farm and refinery gate, plummeted 1.9 percent in April, the biggest drop on records dating to 1947, the Labor Department said.

Much of the decline was due to an 8.6 percent fall in energy prices. However, the so-called core PPI, which strips out volatile food and energy costs, also tumbled sharply, falling 0.9 percent on the back of drops in prices for cars, SUVs and other light trucks, and cigarettes. It was the largest decline in core PPI since August 1993.

The report was likely to fuel concerns over the possibility of deflation, or a widespread decline in consumer prices. Economists polled by Reuters had expected the PPI to drop just 0.6 percent with the core rate down just 0.1 percent.

But some economists cautioned against an overreaction.

"This is a very weak inflation number and will certainly raise some concerns regarding deflation. However, most of the decline is due to falling oil prices and that's due to the end of the Iraq war," said Peter Cardillo, chief strategist at Global Partners Securities Inc. in New York.

The dollar weakened slightly after the report was released. Treasury bond prices initially moved higher but quickly fell back as traders focused on a positive report on manufacturing.

Car prices fell 2.6 percent last month, their biggest drop since October 2001, while prices for light trucks fell 4.6 percent, the largest drop since February 1982.

Vehicle prices have shown a great deal of volatility in recent months, reflecting on-again, off-again sales incentives from manufacturers. Automakers ratcheted up incentives to record levels in April, according to many industry analysts.

At the same time, cigarette prices slid a sharp 9.6 percent, their largest fall since August 1993.

If car, light truck and cigarette prices were excluded, the core PPI would have risen 0.2 percent, the department said.

Record drops for the cost of gasoline and home heating oil partly accounted for the sharp drop in energy costs. Gasoline prices fell 22.3 percent, heating oil was down 29.3 percent.

But other energy costs also fell sharply. Prices for liquefied petroleum gas fell 25.9 percent and natural gas prices dipped 3.1 percent.

The department said PPI would have still been down 0.5 percent if only energy prices were stripped out.

Food prices rose 0.9 percent last month.

The report also showed falling prices further back in the production pipeline. Prices at the intermediate goods level fell a record 2.2 percent, but were unchanged excluding food and energy. Crude goods prices posted a record 16.3 percent drop and were off 1.3 percent stripping out food and energy.