NEW YORK — A sharp rebound in oil prices sent the stock market into its latest tailspin Wednesday, as worries mounted that the Federal Reserve might have to raise interest rates to stem inflationary pressures.
The Dow Jones industrial average lost more than 200 points as oil futures jumped more than $5 a barrel, nearing their record close set Friday.
Shares of financial companies, a sector especially sensitive to interest rates, led the stock market down.
Oil's rise since last week has shaken the belief that some investors and analysts held that the economy could strengthen in the second half of the year, when the effects of the government's economic stimulus package and the Federal Reserve's rate cuts since last year are more fully felt.
The fate of stocks "completely depends on the price of oil," said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, N.Y. "If the price of oil does not break -- if the bubble does not break -- then we're talking about the resumption of the bear market" in share prices.
Their slide Wednesday was paced by the leap in the price of crude, which surged as much as $7 a barrel after the government reported that inventories of crude fell more than expected last week. Oil futures settled at $136.38, up $5.07, on the New York Mercantile Exchange. On Friday, crude soared $10.75 a barrel to a record close of $138.54, prompting the Dow to plunge nearly 400 points.
Demonstrating the tremendous effect of costlier oil on consumers, the average retail price of self-serve regular gasoline rose Wednesday to $4.052 a gallon nationwide and $4.496 in California, according to .
"This is just bad news across the board," said Andrew Lipow, a Houston-based consultant and former trader. "It is going to take its toll."
Although U.S. oil inventories have been falling for weeks as refiners put off buying more crude at its recent prices, Lipow and others were surprised by the size of last week's decline.
But Lipow said he wasn't worried about worldwide supplies right now.
"There's plenty of crude oil out there," he said.
In the stock market, the fear is that its rally since mid-March was not the start of a lasting market recovery but rather a temporary respite within a more wrenching bear market.
In particular, investors worry that higher interest rates -- along with further advances in gasoline prices -- could push back any economic rebound.
