The latest spike in oil prices was big enough to spur worries that consumer spending could decrease and oil could surpass $50 per barrel, although stocks had managed to rally in recent weeks despite a steady climb in prices. A barrel of light crude was quoted at $48.35, up $1.59, on the New York Mercantile Exchange.

Investors also were nervous about third-quarter earnings after Morgan Stanley missed Wall Street expectations by a wide margin, and fast-food chain Wendy's International Inc. posted a profit warning.

"Morgan Stanley certainly brought about some profit taking today after the recent runup in stock prices we've seen over the past several weeks," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "The question now for the markets, for the near term, is whether we give back most of the gains since August or just half of the gains. And oil will play a big part in that."

According to preliminary calculations, the Dow fell 135.75, or 1.3 percent, to 10,109.18, the lowest close for the Dow since Aug. 24.

Broader stock indicators also were substantially lower. The Standard & Poor's 500 index was down 15.74, or 1.4 percent, at 1,113.56, its lowest close since Sept. 1. The Nasdaq composite index dropped 35.47, or 1.8 percent, to 1,885.71, the lowest close for the Nasdaq since Sept. 9.

It was the biggest one-day drop for all of the major indexes since Aug. 6.

The run on oil was spurred by a new government report which said the nation's supply of crude fell by 9.1 million barrels last week, a wider decline than analysts had expected after a 7.1 million barrel drop the week before.

"The oil situation is interesting in that when it started going up a few weeks ago, the market continued to rally. I think the drop today may have more to do with psychology than any actual impact from oil," said Richard Dickson, senior market strategist at Lowry's Research Reports. "I think people are looking at oil, looking at the warnings and the poor earnings, and they're thinking this is a good time to get out with some profits."

Morgan Stanley's troubles also weighed heavily on Wall Street, which had seen positive earnings earlier in the week from Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. Morgan Stanley posted a 34 percent drop in third-quarter profits, missing Wall Street forecasts by 17 cents per share. Shares of Morgan Stanley tumbled $3.66 to $48.72.