Wall Street pulled back Monday after Microsoft withdrew its bid for Yahoo and oil prices briefly rose above $120 a barrel to a new record.
Microsoft had offered $47.5 billion to buy Yahoo but scrapped the bid late Saturday when the software maker and the Internet provider could not agree on a sale price.
The failed negotiation came as a disappointment to Wall Street, as merger-and-acquisition activity tends to signal to the broader market that corporate America is optimistic about the future.
A jump in oil prices raised concern that inflation could force consumers, who account for more than two-thirds of the economy, to cut their spending on discretionary items. Crude oil futures for June delivery surged to a new intraday high of $120.36 a barrel on the New York Mercantile Exchange before pulling back to end the day up $3.65 at a record $119.97. The jump came amid worries over supply disruptions in areas including Nigeria, Iran and Iraq.
"Energy is a very important piece," said Russell Croft, portfolio manager at Croft Leominster Investment Management in Baltimore, referring to the mood of investors and consumers. "It's the price at the pump, it's what people read about."
Concerns about the effect of energy prices had slipped to the background on Wall Street in recent weeks as investors focused more on earnings, the economy and on what the Federal Reserve might do about interest rates.
When the Fed cut rates by a quarter of a point last week, it reminded Wall Street that inflation remained a priority along with the uncertain economy.
There is a growing sense on Wall Street that the Fed is in the process of putting its rate cuts on hold, and accelerating inflation would make such a pause more likely.
The Dow Jones industrial average fell 88.66 points, or 0.7%, to 12,969.54.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 6.41 points, or 0.5%, to 1,407.49, while the Nasdaq composite index fell 12.87 points, or 0.5%, to 2,464.12.
Bond prices rose early as stocks declined. In late trading, however, bond prices declined and the yield on the 10-year Treasury note, which moves opposite its price, rose to 3.87% from 3.86% late Friday.
Gold prices also climbed, rising $16.20 to $872.30. The dollar traded mixed against other major currencies, with the euro gaining 0.008 to $1.550.
Despite investors' concerns about the economy, Wall Street has logged a sizable rebound since its March lows, said John Merrill, chief investment officer at Tanglewood Capital Management in Houston. He said the back-and-forth in stocks is to be expected, particularly after recent gains.
"The market can only go in one direction for so long before you just have to change," Merrill said.
"Our idea is that we're in a long, soft patch," Merrill said. "The economic problems we have with home building and the over-leveraged consumer and the over-leveraged banking system -- they are problems that are going to be with us for a while."
Investors took some encouragement from a key reading on the U.S. service sector. The Institute for Supply Management said its April index of non-manufacturing activity rose to 52 from 49.6 in March. A reading above 50 signals economic expansion; analysts had expected the figure would come in at 49.3, according to economists surveyed by Thomson Financial.
But the rise in oil prices still weighed on a number of sectors including retail, which depends on consumers, and airlines, whose profits are hurt by high fuel costs. Macy's fell $1.21, or 4.6%, to $25.09, while J.C. Penney fell $1.86, or 4.1%, to $43.32.
Delta Air Lines fell 39 cents, or 4.6%, to $8.11, and Continental Airlines declined $1.01, or 5.4%, to $17.78.
Yahoo fell $4.30, or 15%, to $24.37 after Microsoft's decision to walk away, while shares of the software giant slipped 16 cents to $29.08.
Helping to offset some of investors' disappointment over the abandoned Yahoo deal was a Wall Street Journal report that Deutsche Telekom is considering a bid to buy Sprint Nextel or its Nextel unit, according to people familiar with the discussions.
Sprint rose 83 cents, or 10.5%, to $8.72 on the report and on news reports that Sprint may spin off its Nextel unit.
Countrywide Financial fell 62 cents, or 10.4%, to $5.36 after a Wall Street analyst said Bank of America should abandon its proposed takeover of the mortgage lender. Another analyst suggested the deal would probably be renegotiated for a lower price. Bank of America fell 82 cents, or 2.1%, to $38.97.
Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange.
The Russell 2,000 index of smaller companies fell 1.39 points, or 0.2%, to 724.35.
Overseas, Japan's and Britain's markets were closed for holidays. Germany's DAX index rose 0.1%, and France's CAC-40 fell 0.1%.