Natural-gas futures fell sharply Tuesday after a report showed U.S. industrial activity fell for the first time in 10 months.

Natural gas for June delivery settled down 13.6 cents, or 3.2%, to $4.182 a million British thermal units on the New York Mercantile Exchange.

The Federal Reserve said industries used 76.9% of their capacity last month, down 0.1 percentage point from the revised 77% March figure. Manufacturing capacity utilization dropped 0.4 percentage point to 74.4%.

Economists surveyed by Dow Jones Newswires had forecast a 0.3-percentage-point increase in output and a capacity utilization rate of 77.6%.

The manufacturing sector accounts for one-third of U.S. natural-gas demand, and any signs of a slowdown tends to pull the price lower.

"They all use natural gas as their baseload energy," said Peter Beutel, president of the trading advisory firm Cameron Hanover.

Natural-gas prices started the day lower, reversing much of Monday's gains as market participants awaited a clearer picture of weather-driven demand this summer. Forecasts continue to call for below-normal temperatures for most of the next five days--little-changed from Monday--followed by a return to above-normal temperatures in the central and eastern U.S., according to Tradition Energy.

"We are going to see a return of some hot weather, but not strongly enough to generate elevated cooling use, so we're stuck in the middle of this range," said Gene McGillian, broker at the Stamford, Conn., firm.

Natural-gas futures have wobbled between $4 and $4.35 a million British thermal units since May 5, when a sell-off across the commodities market sent the contract tumbling from highs above $4.70. Since then, the market has seen an exodus of speculative traders, keeping prices under pressure, McGillian said.

Traders will also be awaiting further cues from Thursday's report on U.S. gas inventories, which stand at 2% below the five-year average and 12% less than 2010 levels.

Supplies, however, are expected to grow strongly in the coming weeks. The U.S. Energy Information Administration said last week it expects working gas inventories to build "strongly" during summer and approach record highs in the second half of 2011.

"With weather-related demand representing a non-event for a few more weeks, we still see sideways trade into early June," said Jim Ritterbusch, head of the trading advisory firm Ritterbusch & Associates in Galena, Ill.

FUTURES              SETTLEMENT          NET CHANGE 
Nymex June           $4.182              -13.6c 
Nymex July           $4.246              -13.3c 
Nymex Aug            $4.294              -12.9c 
CASH HUB             RANGE               PREVIOUS DAY 
Henry Hub         $4.30-4.09             $4.18-$4.31 
Transco 65        $4.17-$4.05            $4.18-$4.23 
Tex East M3       $4.20-$4.06            $4.44-$4.55 
Transo   Z6       $4.55-$4.48            $4.48-$4.60 
Socal             $4.30-$%4.22           $4.22-$4.31 
El Paso Perm      $4.15-$4.06            $4.06-$4.10 
El Paso   SJ      $4.07-$4.04            $3.99-$4.03 
Waha              $4.18-$4.10            $4.09-$4.17 
Katy              $4.20-$4.06            $4.12-$4.18