With oil at near-record levels, investors are concerned that the economy is caught in a bind between surging energy prices, which could trickle down through the rest of the economy, and higher interest rates that could make capital harder to come by for businesses seeking to expand.

Oil prices fell somewhat after an early spike as OPEC publicly mulled another production increase in an attempt to meet rising demand. However, crude remained well above $56 per barrel and appeared unlikely to drop in the short term. A barrel of light, sweet crude settled at $56.62, down 10 cents, on the New York Mercantile Exchange.

"The inflation fears are out there and they're at an elevated level today," said Jay Suskind, head trader at Ryan Beck & Co. "There's a lot of fear out there over higher interest rates, and that oil bubble hasn't popped yet. The (stock) buyers just aren't coming out to play. They're hiding."

The Dow Jones industrial average fell 64.28, or 0.6 percent, to 10,565.39. It was the lowest close for the Dow since Feb. 1.

Broader stock indicators also lost ground. The Standard & Poor's 500 index was down 5.87, or 0.49 percent, at 1,183.78, and the Nasdaq composite index lost 0.28, or 0.01 percent, to 2,007.51.

The dollar rose sharply against most major currencies as the expectation of a more aggressive Fed bolstered confidence in the greenback. Bonds moved slightly lower, with the yield on the 10-year Treasury note rising to 4.52 percent from 4.51 percent late Friday. Gold prices fell slightly.

Despite the concern about higher interest rates, most analysts felt the Fed would not raise rates beyond expectations after its meeting tomorrow, though many felt the Fed would telegraph more aggressive hikes in its policy statement.

"This Fed has been very predictable. Unless they really want to change their stripes at this point, which would seem unlikely, you'd expect them to first change the language in their statement before changing their rate policy," said Brian Bruce, director of global investments, PanAgora Asset Management Inc. "They are clearly into no surprises."

Time Warner Inc. fell 28 cents to $18.42 after the company said it would pay $300 million in a settlement with the Securities and Exchange Commission. The SEC charged Time Warner with fraud for making misleading statements about its advertising revenues and subscriber base in its America Online division. The company will also restate three years of financial results.

Two long-suffering sectors, technology and pharmaceuticals, were in focus due to mergers and helped keep the Nasdaq's losses minimal. IAC/InterActiveCorp. announced it would buy search engine Ask Jeeves Inc. for $1.85 billion in stock. Ask Jeeves rose $4.43, or 18.3 percent, to $28.67, while IAC lost 66 cents to $21.63.

In the pharmaceutical sector, Inamed Corp. added $1.97 to $68.21 as Medicis Pharmaceutical Corp. made a $2.8 billion cash-and-stock offer for the maker of cosmetic breast implants. Medicis, known for its skin care treatments, slid $2.57 to $29.11.

Financial data and software company SunGard Data Systems Inc. is in talks to be acquired by private investors for as much as $10 billion, the company said, though it would not say anything about the prospective buyers. SunGard soared $6.12, or 24.5 percent, to $31.07 on the news.

Schering AG tumbled $11.75, or 15.1 percent, to $66 and Novartis AG lost 91 cents to $47.41 as the companies' jointly developed colon cancer drug failed to show any statistical improvement in patients in a clinical trial. Rival Genentech Inc., which already markets a colon cancer drug, surged $5.49, or 10.5 percent, to $58.

General Motors Corp. could cut as much as 28 percent of its 38,000-person non-union workforce as it tries to improve its profitability, according to The Wall Street Journal. The Dow component last week announced severe reductions in its earnings forecasts for the quarter and full year. GM was up $1.07 at $29.69.

Declining issues outnumbered advancers by more than 2 to 1 on the New York Stock Exchange, where volume came to 1.45 billion shares, compared to 2.34 billion on Friday. Friday's volume was inflated by the quarterly expiration of options and futures contracts, and by a rebalancing of the S&P 500.

The Russell 2000 index of smaller companies was down 1.00, or 0.16 percent, at 621.57.