New York

Widening tensions in the Mideast drove oil prices sharply higher, inflaming worries about inflation on Tuesday and sending the stock market to its lowest close in a month.

Bloomberg News

The Dow Jones Industrial Average dropped 168.32 points, or 1.38%, to finish at 12058.02, its third triple-digit decline in the past week. Oil futures on the New York Mercantile Exchange, already up 6% this year, jumped 2.7% to settle at $99.63 a barrel. They rose through $100 in after-hours electronic trading.

Gold reached a new nominal record.

Higher oil prices already are leaking into the U.S. economy through rising prices at the gas pump, which risk curtailing consumers' spending on other products. Economists worry that the fragile U.S. recovery could be stalled or thwarted by higher oil prices. That also drives up the cost of making goods, feeding into inflation.

"The higher the oil price goes and the longer it stays higher, the more it has a direct impact on growth by curtailing it to some degree," said Wasif Latif, vice president of equity investments at USAA Investment Management Co.

Investors on Tuesday became increasingly alarmed at signs that the turmoil is spreading beyond Libya to far larger oil exporters, including Saudi Arabia and Iran. Saudi Arabia is the world's largest oil exporter, accounting for about 9.4% of the global supply in January, while Iran is the third largest.

Fears of unrest intensified in Saudi Arabia on Tuesday as authorities there arrested a prominent Shiite cleric who called for political reforms. Iran reported clashes between protestors and security forces in Tehran.

Worries about inflation, and the need for a safe haven, drove investors into gold, which has recently resumed a decade-long rally. On Tuesday, gold in New York settled at a new nominal record of $1,430.70 an ounce.

"We've seen a lot safe-haven buying," said Frank McGhee, head precious-metal trader at Integrated Brokerage Services in Chicago. Traders are closely watching how Asia and London open overnight, which might bring in further buying to gold from institutional investors.

Comments by Federal Reserve Chairman Ben Bernanke did little to allay worries, investors said. He said he is ready to respond as necessary to a surge in global commodity prices. Still, he cautioned that the recent rise in commodity prices will lead to "at most a temporary and relatively modest increase" in inflation.

The S&P 500-stock index fell 20.89 points, or 1.57%, to finish at 1306.33, with declining volume outpacing rising volume by a ratio of 8-to-1. The Nasdaq Composite fell 44.86 points, or 1.61%, to close at 2737.41.

The stock-market pullback comes after a six-month run that saw the market rise 22% since last September, defying continuing concerns over European debt, a fight over U.S. tax policy and Chinese policy tightening.

"We're now phasing back to reality," said Christian Hviid, chief market strategist for Genworth Financial Asset Management. "We got too complacent as a market, and now we're suddenly all paying attention to the risks a bit more. Maybe the market just chose to ignore the challenges we had because of quantitative easing, or growth in China—now they can't ignore it any more."

With investors increasingly convinced that oil prices will stay elevated, market watchers and analysts are beginning to sharply cut their growth estimates for the U.S., which relies heavily on oil imports.

"Is growth going to come in at 4%, or more like 3% or 3.5%? If that's the new consensus, the market hasn't priced that in yet and the market's got to correct," Mr. Hviid said. "Given the run-up we've had, we need some breathing room to take in the new expectations."

Mr. Hviid said sharp rises in oil prices, such as the one this year, have almost always spelled recession.


Brent crude oil, traded in London, has roared 22% higher so far this year, adding 3.2% on Tuesday to $115.42 a barrel, the highest settlement since Aug. 27, 2008.

"The market is taking some precaution; that's why all commodity traders are jumping up and down now," said Fadel Gheit, oil analyst at Oppenheimer & Co.

Saudi Arabia's stock market tumbled 6.8% on Tuesday and is down 16% so far this year.

"If there are problems in Saudia Arabia, we will feel it and that's causing concern, obviously," said Marc Pado, a U.S. market strategist at Cantor Fitzgerald.

—Matt Phillips and Donna Kardos Yesalavich contributed to this article.

Write to Jonathan Cheng at and Carolyn Cui at