But analysts believe that Wall Street, which sold off substantially last week in response to oil's climb, has found a bottom and that some investors are becoming optimistic that a year-end rally might be possible.

"Clearly we've had oil putting a lot of pressure on this market over the past week or so, but given where oil is right now, we would've expected the market to react even more negatively than where it is," said Brian Belski, market strategist at Piper Jaffray. "With productivity and earnings still pretty strong, and inflation tame aside from oil and gas, we think the market still is set up for a positive move in the fourth quarter."

The Dow Jones industrial average fell 58.70, or 0.6 percent, to 9,988.54. The Standard & Poor's 500 index was down 6.59, or 0.6 percent, at 1,103.52, and the Nasdaq composite index dropped 19.60, or 1 percent, to 1,859.88.

Oil producers and refiners still struggle to recover from Hurricane Ivan's damage in the Gulf of Mexico, and global demand continues to tighten, analysts said, making the markets susceptible to even minimal losses in overall production. And investors worry that if prices rise at the gas pump, consumer spending might be pared back on the brink of the holiday shopping season.

However, given the relatively small drop in share prices yesterday, investors may be accepting the fact of oil in the $40 to $50 range, said Brian Pears, head equity trader at Victory Capital Management in Cleveland: "As you reach $50, you get the risk of speculation. But the inflation data over the past few months has been muted, and it doesn't look like oil is going to have a big impact on the economy, just as long as we can stay at least steady at this price level."

If oil can stay around $50 or less, investors will likely look ahead to third- and fourth-quarter earnings. And with expectations for the third quarter very low after a string of earnings warnings this month, there's a chance the actual results will be come as a pleasant surprise to Wall Street.

The Commerce Department reported yesterday that new home sales rose 9.4 percent to 1.184 million units in August, higher than economists had forecast. While somewhat overshadowed by oil, the data show that consumers were willing to make big purchases even as the economy slowed.

Mortgage giant Fannie Mae climbed 99 cents to $66.50 after striking a deal with regulators in which the company agreed to investigate its top management, including its chief financial officer, and raise additional capital. Morgan Stanley downgraded Fannie Mae to "underweight."

Wal-Mart Stores Inc. was upgraded to "buy" from "neutral" by Banc of America, which said the recent selloff in the company's shares, combined with promising profit potential, make the stock attractive. Wal-Mart fell 29 cents to $52.52.