Weakness in the dollar — which fell sharply against the Japanese yen and lost ground against other currencies — helped send crude futures soaring past $51 per barrel, much as they did during the third quarter last year, when the major stock indexes fell to multiyear lows. A barrel of light crude settled at $51.15, up $2.80, on the New York Mercantile Exchange.

The surge in crude futures sparked fears that the stock market would tumble further. That overshadowed strong earnings from Dow component Home Depot Inc. and intensifying merger talks between Federated Department Stores Inc. and May Department Stores Co.

"This distressing news about oil prices is really nagging at investors," said Joseph Battipaglia, chief investment officer at Ryan Beck & Co. "It's not enough to break the camel's back, but that pressure will be there for a while."

According to preliminary calculations, the Dow fell 174.02, or 1.61 percent, to 10,611.20, its lowest close since Feb. 3.

Broader stock indicators also fell substantially. The Standard & Poor's 500 index was down 17.43, or 1.45 percent, at 1,184.16, its lowest level since Jan. 31, and the Nasdaq composite index dropped 28.30, or 1.37 percent, to 2,030.32, its worst close since Jan. 25.

The Conference Board reported that consumer confidence fell slightly in February, hurt by January's losses on the stock market, continued high energy prices and slow job growth. The independent research group's confidence index fell to 104 from a revised 105.1 in January

The dollar's drop was a negative for oil prices, since most major transactions are conducted in dollars, and foreign oil producers must charge more in order to make up for the falling value of the greenback. The dollar also pushed bond prices slightly lower, with the yield on the 10-year Treasury note rising to 4.29 percent. Gold prices rose as investors hedged against the dollar's losses.

And after last week's jump in wholesale prices, many investors were bearish on January's Consumer Price Index, due out tomorrow, fearing that a jump in consumer prices could be yet another sign of inflation.

"We're very sensistive to any type of inflationary indications that are out there, whether it's the weaker dollar or if it's fear of tomorrrow's CPI number," said Scott Wren, equity strategist for A.G. Edwards & Sons. "Between a lower dollar and higher oil and the bond market a little weak here, you're seeing an inflation scare coming on a little bit."

Home Depot said its earnings rose 10 percent for the fourth quarter, meeting Wall Street's profit forecast of 47 cents a share. The home improvement giant also reiterated its outlook for the full year. But Home Depot lost $1.74 to $40.28, however, as many investors were hoping for a stronger forecast.

Federated fell $1.43 to $55.29 as the company reported profits that beat Wall Street expectations by a penny per share. Revenues, however, fell short for the quarter, and the owner of Macy's and Bloomingdale's department stores said its first-quarter profits could fall short of forecasts.

Federated's stock was also pressured by reports that merger discussions with May were moving forward. The New York Times reported that May was suspending its search for a new chief executive officer because of the progress in talks with Federated. May rose 17 cents to $33.62

Novartis AG added $1.56 to $50.46 as the drug maker announced plans to buy German generic drug maker Hexal AG and U.S. drug maker Eon Labs Inc. for a total of $8.3 billion in cash. Eon Labs surged $2.56 to $30.48.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume was heavy.

The Russell 2000 index of smaller companies was down 12.20, or 1.94 percent, at 617.93.