Anxiety is making a comeback on Wall Street.
Stocks skidded again Wednesday, marking their worst two-day performance since February, as crude oil leaped above $134 a barrel and the Federal Reserve issued a downbeat economic forecast without any suggestion of further interest rate cuts.
The Dow Jones industrial average tumbled 227.49 points, or 1.8%, to 12,601.19, and the Standard & Poor's 500 index slumped 1.6%. The Dow is down nearly 430 points in the last two days.
After rising steadily from the depths of credit-crisis and recession worries 10 weeks ago, the stock market this week shifted back into apprehension mode. Many investors, increasingly concerned about the effect of high oil prices on consumer wallets and corporate bottom lines, seem willing to yank money out of the market at the first sign of trouble.
"Fear crept back in really fast," said John Bollinger, head of Bollinger Capital Management in Manhattan Beach. "Over the past nine months, the downside has been so dramatic that it's hard for people to believe in the upside. The market goes down 50 points and people think it'll go down 100. It goes down 100 and people think it'll go down 200."
Oil soared after the government released data showing that reserves fell last week. Crude futures traded as high as $134.15 before finishing the day up $4.19 at a record close of $133.17 a barrel in New York.
The continuing ascent of energy prices sent airline stocks into severe turbulence Wednesday as AMR, parent of American Airlines, said it would eliminate some flights to offset steep fuel costs. The carrier also said it would impose a $15 fee on the first piece of luggage checked by a traveler.
AMR shares plunged $1.98, or 24%, to $6.22. UAL, operator of United Airlines, sank $3.41, or 29%, to $8.15. Delta Air Lines fell $1.13, or 16%, to $5.77.
As crude prices climb further into uncharted territory, investors worry that higher gasoline prices will lead consumers to cut back spending on things other than fuel and that companies won't be able to pass the full extent of rising raw-material costs to customers, hurting profits.
Although such inflationary concerns aren't new, the market had been willing to overlook them as it celebrated the Fed's interest rate cuts and other actions to combat the housing meltdown and credit crunch.
But Wednesday the Fed released minutes of its meeting in late April that all but confirmed that it wouldn't cut rates again even if the economy weakened further. The Fed also said that last month it lowered its projection for 2008 economic growth by almost 1 percentage point and raised its forecast of inflation for the year by a point.
The central bank had already signaled its intention to halt rate cuts. But the statement by the Fed -- describing its rate cut last month as a "close call" because of inflation concerns -- was an unwelcome exclamation point on a day the market already was reeling from a fresh oil shock.
The apparent end to rate cuts removes a key element of support for stock prices, whose near-term prospects could rest on corporate America's ability to improve earnings in the second half of the year.
The Fed's inflation forecast, along with oil's continued rise, pushed up bond yields. The 10-year T-note's yield, which had fallen Monday and Tuesday, rose to 3.81% from 3.77% late Tuesday.
There is a sharp divide among economists in their assessment of inflation. Some say the moderating economy will relieve pricing pressures as consumers curtail spending. Others say overseas growth will keep driving up prices of industrial commodities.
In other market highlights:
* The dollar fell against most other major currencies, while gold prices advanced.
* The Nasdaq composite index slid 43.99 points, or 1.8%, to 2,448.27. The S&P; 500 fell 22.69 points to 1,390.71. The Russell 2,000 index of smaller-company stocks fell 8.53 points, or 1.2%, to 727.11. Declining issues outnumbered advancers by about 7 to 3 on the New York Stock Exchange.
* Financial stocks slid, in part on a report that rating firm Moody's failed to correct a computer error that bestowed higher-than-warranted grades on some complex European securities. Moody's shares fell $6.99, or 16%, to $36.91. McGraw-Hill, owner of rival rater Standard & Poor's, fell $2.41, or 5.5%, to $41.18. An index of financial stocks in the S&P; 500 sank 2.6%.
Among the biggest U.S. financial firms, Bank of America fell 76 cents, or 2.1%, to $34.63; JPMorgan Chase slid $1.28, or 2.9%, to $42.42; Citigroup fell $1.05, or 4.7%, to $21.06; and American Express fell $1.83, or 3.9%, to $45.48.
* Hewlett-Packard lost $1.66, or 3.6%, to $44.80 after the computer maker late Tuesday posted a 16% rise in profit but analysts focused on the risks of its deal to acquire Electronic Data Systems.
* Intuit rose 93 cents, or 3.4%, to $28.14 after robust sales lifted the financial software maker's profit 21%.
* Overseas, key stock indexes fell 1.7% in Japan, 1.1% in Germany and 0.5% in France. Shares rose 0.1% in Britain.
Times wire services were used in compiling this report.