Wall Street retreated after crude prices jumped $1.63 to settle at $63.94 a barrel on the New York Mercantile Exchange following the U.S. embassy's warning that there was a "threat against U.S. government buildings in the kingdom." It was the second alert from the embassy in two weeks.

Meanwhile, gasoline futures also hit a record high of $1.86 per gallon on the NYMEX, adding to the market's gloom with heightened fears of a slowdown in consumer spending.

"Two thing are primarily at work: Oil prices are higher than people would like and we're seeing a little profit taking," said Joseph Lisanti, editor of Standard & Poor's weekly newsletter, The Outlook. "We had a 3.6 percent rise in the S&P 500 in July. It was the best July since 1997, better than two-thirds of all Julys since 1928."

Before oil surged, acquisition news catapulted stocks in the opening minutes of trading. E-Trade Financial Corp. and Quest Diagnostics Inc. said they are buying rivals in deals worth more than $1.6 billion combined, and a British newspaper reported that Cisco Systems Inc. may bid for cell-phone maker Nokia Corp.

Investors were also worried about tomorrow's meeting of Federal Reserve policy makers, who are expected to raise the short-term federal funds rate by a quarter percentage point to 3.5 percent — the 10th hike since last summer.

The Dow Jones industrial average fell 21.10, or 0.2 percent, to 10,536.93. The Dow has lost 160.66, or 1.5 percent, since Thursday.

Broader stock indicators also declined. The Standard & Poor's 500 index slid 3.29, or 0.27 percent, to 1,223.13, and the Nasdaq composite index dropped 13.52, or 0.62 percent, to 2,164.39.

Bonds fell, with the yield on the 10-year Treasury note at 4.42 percent, up from 4.39 percent Friday, the highest level since April. The U.S. dollar was flat against the euro, as gold prices moved slightly lower.

Wall Street will be watching closely tomorrow for changes to the Fed's policy statement indicating it will step up its tightening regime. A policy change is unlikely, but analysts are split between those who feel the Fed's rate hikes have been too aggressive and those who think the central bank isn't doing enough to stave off inflation.

"It isn't that the Fed strategy isn't clear, but it's whether the Fed strategy will work," said John P. Waterman, chief investment officer at Rittenhouse Asset Management.

Stock in companies with announced deals climbed, with E-Trade rising $1.24 to $16.10, and Quest up $1.71 at $49.21. Quest, the nation's top provider of medical tests, said it is planning to acquire LabOne Inc. in a $934 million deal that will expand Quest's share of the testing market. E-Trade will buy Harrisdirect for $700 million.

The possibility of a deal involving Cisco and Nokia was reported by British newspaper The Business, which said technology infrastructure company Cisco is considering buying a wireless company, and that Nokia had been identified as the most likely target. Cisco lost 4 cents to $19.25; Nokia rose 14 cents to $16.08.

"The acquisition story helps get investors more invested in stocks and interested in stocks," Waterman said. "There's a lot of investors sitting on the sidelines now, particularly retail investors."

The market for initial public offerings may also be warming up. Ruth's Chris Steak House Inc. increased the size of its IPO to 13 million shares from 11.43 million, a day after Chinese Web search engine Baidu.com Inc. rose 354 percent in its market debut Friday.

Oil and gas producer Kerr-McGee Corp. rose $3.03 to $85.01 after The Wall Street Journal reported it is nearing a deal to sell its North Sea oil assets for about $3.5 billion. The report said a deal could be struck in the next few days as the company tries to reshape itself as a primarily domestic developer of oil and natural gas fields.

Whirlpool Corp. submitted a binding offer to acquire Maytag Corp. for $20 per Maytag share, up from an earlier offer of $18 a share and 43 percent higher than a deal Maytag had already agreed to with a private-equity firm. Whirlpool rose $2.75 to $82.46; Maytag rose $1.60 to $18.58.

Despite falling to a second-quarter loss from a year-ago profit and saying it will consider filing for bankruptcy, shares of Delphi Corp. rose 7 cents to $5.03. The nation's biggest auto-parts maker continues to be hurt by the ailing domestic auto industry, and said Friday it has begun to draw $1.5 billion from a $1.8 billion revolving credit facility. All three ratings agencies have downgraded its debt ratings to highly speculative levels.

Decliners led advancers 5 to 3 on the New York Stock Exchange where preliminary consolidated volume was 1.8 billion shares, down from 1.93 billion at the same time Friday.

The Russell 2000 index of smaller companies fell 3.19, or 0.48 percent, to 659.60.

Overseas, Japan's Nikkei stock average rose 0.11 percent. In afternoon trading, Britain's FTSE 100 was up 0.56 percent, Germany's DAX index was up 0.22 percent, and France's CAC-40 was up 0.44 percent.