Investors reacted strongly to the oil hike, selling off rapidly as the afternoon progressed. A barrel of light crude closed at a record-high $44.41, up $1.58.

Over the past few weeks, drops in stock prices have corresponded almost directly to rising oil prices, which have climbed on terrorism fears. Today's rise, attributed to Russian oil conglomerate Yukos' continuing troubles with the government there, prompted heavy selling in the last hour of trading.

According to preliminary calculations, the Dow fell 163.48, or 1.6 percent, to 9,963.03, closing below the 10,000 mark for the third time in the last 10 sessions. It was the blue chips' second-largest slide of 2004 — it lost 168 points on March 11, when the markets turned sharply downward to end the rally that began a year earlier.

Broader stock indicators also fell sharply. The S&P 500 index dropped 17.93, or 1.6 percent, to 1,080.70, and the Nasdaq was down 33.43, or 1.8 percent, at 1,821.63.

It was the lowest close for the Nasdaq since Sept. 30, and the lowest for the S&P 500 since Dec. 17.

"We've had some good economic numbers, but with the high price of oil and the terror alert, there's a lot of pressure on the market on a short-term basis," said Joseph Battipaglia, chief investment officer at Ryan Beck & Co. "These oil prices will eat away at consumer confidence, consumer spending and start to affect business decision making."

Oil prices dominated investors' thoughts, causing them to ignore other news, both good and bad. The Labor Department reported a drop of 11,000 first-time unemployment filings, and said the number of people who continue to receive benefits fell by 35,000 to 2.91 million — down from 3.62 million a year ago.

Many investors, however, were waiting to see what clues the jobs creation report would have about economic growth. Last month's report fell markedly short of expectations.

Retail sales figures, another key economic barometer, failed to live up to expectations. Major retailers announced mixed sales data today, with many apparel merchants issuing disappointing numbers. Companies including Wal-Mart Stores Inc. and Target Corp. had stronger sales in July that were mostly in line with expectations, but investors were hoping for better news. Wal-Mart fell $1.15 to $52.05, while Target skidded $1.37 to $41.76.

The concern on Wall Street is that the retail numbers reflect consumer distress over rising prices, particularly oil. Higher oil prices could cause inflation as retailers pass higher shipping costs to customers, and curtail consumer spending as Americans pay more for gas.

"A lot of good earnings numbers have come out, but the overriding economics of oil has dwarfed any of the individual company results," said Brian Bruce, director of global investments for PanAgora Asset Management Inc. "I think we need continued positive economic news and a string of small gains. That might get out of this cycle where oil goes up, stocks go down."

Goodyear Tire & Rubber Co. was up 5 cents at $10.90 after it swung to a profit in the second quarter on record tire sales. The company posted earnings of 14 cents per share, 6 cents better than analysts' estimates.

Generic drug maker Barr Pharmaceuticals Inc. saw a fall in second-quarter earnings because of heavy litigation charges. Without the one-time expenses, Barr edged past Wall Street expectations by 2 cents per share. Barr, which gave an improved 2005 outlook, climbed 98 cents to $36.70.

Frontier Oil Corp., like many energy companies, showed strong earnings thanks to this year's rise in oil prices. Frontier beat expectations by 25 cents per share, but fell $1.19 to $19.35.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 1.03 billion shares, compared with 1.05 billion at the same point yesterday.

The Russell 2000 index of smaller companies was down 10.31, or 1.9 percent, at 532.36.

Overseas, Japan's Nikkei stock average rose 0.5 percent. In afternoon trading, Britain's FTSE 100 closed up 0.1 percent, France's CAC-40 gained 0.4 percent for the session, and Germany's DAX index climbed 0.1 percent.

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