Surging oil prices and worrisome inflation data are raising doubts about the durability of the stock market's 10-week-old recovery.
The Dow Jones industrial average tumbled nearly 200 points Tuesday as crude oil shot above $129 a barrel to another record and April wholesale inflation clocked in at twice the level expected by economists, renewing fears about the ability of consumers to lift the economy out of the doldrums.
Investors also were spooked by weak earnings at Home Depot and an influential stock analyst's prediction that the credit crisis could afflict Wall Street firms well into 2009.
The market's recent rally -- in which the Dow climbed nearly 1,300 points from March 10 to Monday -- has been paced by signs that the economy could weather the housing dive and credit crunch with only moderate damage and limited layoffs.
And the Federal Reserve's interest rate cuts and the government's economic stimulus package have raised hopes that growth will pick up in the second half of the year.
But continued inflationary pressures, coupled with the downbeat retailing news, raise the specter that corporate profits will remain subdued as price hikes intensify. Investors fear a so-called double dip, in which the market's advance proves to be only a respite before the resumption of a bear market.
"The problem is now we're in phase two of this credit crisis, which is the real-world economic impact," said Peter Boockvar, equity strategist at New York brokerage house Miller Tabak & Co. "Companies are saying things aren't getting any better. The economy is remaining sluggish."
Bulls counter that the market was poised to give back some gains and that inflationary concerns are overdone.
"This isn't the-tip-of-the-iceberg kind of stuff," said Art Hogan, chief market strategist at Jefferies & Co. "This is more a low-volume sell-off with a couple of negative catalysts after a pretty good run in the market."
The Dow sank 199.48 points, or 1.5%, to 12,828.68. The Standard & Poor's 500 index slid 13.23 points, or 0.9%, to 1,413.40.
The Nasdaq composite index fell 23.83 points, or 1%, to 2,492.26.
Crude futures jumped $2.02 to $129.07, a record close, on the New York Mercantile Exchange after peaking at $129.60. Oil is up 35% this year and has nearly doubled in the last 12 months.
Shares of Home Depot slid $1.50, or 5.2%, to $27.37 after the home-improvement giant reported that profit tumbled 66% in its latest quarter as the housing pinch and the soft economy dissuaded homeowners from undertaking major renovation projects.
Target fell 63 cents to $54.29 after it posted lower sales than analysts had forecast even though the retailer's profit beat Wall Street expectations.
Those reports followed by a day dim forecasts for the rest of the year by Home Depot rival Lowe's and office-supply chain Staples. Lowe's fell 49 cents to $23.76 and Staples rose 4 cents to $23.61.
Poor results from economically sensitive companies are stoking concerns that consumers will have to further reduce much of their spending in the coming months to compensate for higher gasoline prices.
Meanwhile, the government reported Tuesday that a measure of wholesale inflation rose 0.4% last month rather than the 0.2% economists had predicted.
The rise in so-called core producer prices was particularly worrisome because it excludes volatile food and energy prices, suggesting that higher energy costs could be filtering through to other goods and services.
Investors also were unsettled by a report from analyst Meredith Whitney at Oppenheimer & Co., who said major banks might have to take an additional $170 billion of write-offs stemming from the credit and mortgage crises -- on top of normal losses caused by the economic downturn.
"We believe losses will only accelerate further and [will be] far worse than even the most draconian estimates," she wrote in a report to clients.
Her comments helped drag down shares of financial firms. Citigroup fell 88 cents, or 3.8%, to $22.11, and JPMorgan declined $2.29, or 5%, to $43.70.
Fannie Mae dropped $1.21, or 4.2%, to $27.74 after S&P; lowered a rating of the mortgage buyer's financial health.
As they slid Tuesday, financial stocks were displaced by the technology sector as the largest industry group in the S&P; 500 based on total stock market value.
Tech shares, which last dominated the broad stock market benchmark in 2002, accounted for 16.26% of the index after trading ended.
Financial firms now make up 16.19% of the index.
Although tech stocks in the S&P; 500 fell 1.4% on Tuesday, they are up 4% this year. Financial stocks are down 4% year to date.
In other market highlights:
* Government bond yields declined along with stocks. The yield on the benchmark 10-year Treasury note fell to 3.78% from 3.83% late Monday. Gold prices gained, and the dollar dropped against other major currencies.
* Declining issues led advancers by nearly 2 to 1 on the New York Stock Exchange.
* The Russell 2,000 index of smaller-company stocks fell 2.81 points, or 0.4%, to 735.64.
* Overseas, key stock indexes dropped 0.8% in Japan, 2.9% in Britain, 1.5% in Germany and 1.7% in France.
The Associated Press was used in compiling this report.