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.
"People are nervous the Fed is going to change course," said Brian Wesbury, chief economist at First Trust Advisors in Lisle, Ill. "That's what we're living through."
The Dow tumbled 205.99 points, or 1.7% to 12,083.77 as heavy selling in the final half-hour drove the index to its low point of the day. The Standard & Poor's 500 index lost 22.95 points, or 1.7%, to 1,335.49.
Weakness in technology stocks caused the Nasdaq composite index to slump 54.93 points, or 2.2%, to 2,394.01.
Railroads, airlines and other businesses that are at the mercy of fuel prices got crushed. The Dow Jones transportation index, which hit a record high last week, slumped 4.7%. Union Pacific skidded 5.7%, while Burlington Northern Santa Fe dropped 7%. American Airlines parent AMR tumbled 9.5%.
Financial stocks in the S&P 500 dropped 3.2% as a group. Higher interest rates could squeeze the sector's profit margins and -- by further depressing the housing market -- help lead banks and brokerages through another round of mortgage-related write-offs. Investment bank Lehman Bros. Holdings tumbled 13.6% to a nearly five-year low. Citigroup lost 5.2%, and JPMorgan Chase fell 3%.
Washington Mutual, whose health recently has been the subject of widespread speculation, declined 62 cents, or 9.3%, to $6.06. The giant savings and loan's stock is down 72% since the start of February.
The financial sector, which was pummeled last year and early this year by the sub-prime crisis and resulting credit crunch, staged a rally starting in March after the Fed began giving emergency loans to investment banks and engineered the sale of Bear Stearns Co. to JPMorgan in March.
But Lehman's revelation Monday that it would post a $2.8-billion loss for its fiscal second quarter and raise $6 billion in fresh capital reminded investors that Wall Street firms were still grappling with mortgage and credit market troubles.
"They're out of the worst of it from a viability standpoint," said Peter Boockvar, equity strategist at New York brokerage house Miller Tabak & Co. in New York. "The problem now is more write-downs and [raising of] equity. That's no salvation for shareholders."
In other market highlights:
* Government bond yields fell along with stocks. The yield on the benchmark 10-year Treasury note slipped to 4.07% from 4.11% late Tuesday. The dollar lost ground against other major currencies, while gold prices rose.
* Declining issues outnumbered advancers by more than 4 to 1 on the New York Stock Exchange.
* Overseas, key stock indexes slumped 1.8% in Britain and Germany and 2.1% in France. In Japan, shares gained 1.2%.
Hamilton reported from New York, Douglass from Los Angeles.