While the economy has so far absorbed high energy costs, fears remain that chronically high prices could spark inflation. A barrel of light crude settled at $67.94, up 87 cents, on the New York Mercantile Exchange.

Strength in the labor market also unnerved investors, as the Labor Department reported a third straight drop in weekly unemployment claims. With the monthly jobs report due tomorrow, Wall Street worried that more people on the nation's payrolls would mean increased demand, another potential catalyst for inflation.

Should the inflation threat increase, the Federal Reserve would continue raising interest rates to combat higher prices — a move that would make consumer loans and mortgages more expensive and corporate expansion efforts more costly.

"You still have a lot of uncertainty, and the jobs report tomorrow, which will set the stage for what the Fed could do," said Jeff Kleintop, chief investment strategist for PNC Financial Services Group in Philadelphia. "You're just not going to see a lot of buyers in the market ahead of that."

The Dow Jones industrial average fell 23.05, or 0.21 percent, to 11,216.50.

Broader stock indicators were barely mixed. The Standard & Poor's 500 index lost 2.52, or 0.19 percent, to 1,309.04, and the Nasdaq composite index rose 1.42, or 0.06 percent, to 2,361.17. It was the Nasdaq's best close since Feb. 16, 2001.

Bonds fell, with the yield on the benchmark 10-year Treasury note rising to 4.89 percent from 4.84 percent late yesterday. The dollar fell against most major currencies. Gold prices rose, surpassing the $600 per ounce mark for the first time since 1981.

The increase in gold prices and the rise in oil spooked stock investors, as commodities are generally seen as a hedge against higher interest rates. With the economy growing solidly, investors worry that more rate hikes will pressure corporate earnings, and thus share prices. However, there's also an unwillingness to abandon stocks, since once the Fed has stopped raising rates, there's the potential for stocks to rally.

Among individual companies, investors sent shares of Dow industrial Merck & Co. down $1.15, or 3.2 percent, to $34.84 after a New Jersey jury said the company hid the potential dangers of its painkiller Vioxx and awarded a plaintiff $5.4 million in damages. The verdict could create further legal troubles for the drug maker.

The overall market was mostly unmoved by the latest influx of monthly retail sales reports. While the reports were somewhat disappointing, investors may have felt that a dropoff in spending could prompt the Fed to hold off on further rate hikes.

Among retailers, Wal-Mart Stores Inc. said its same-store sales, or sales at outlets open at least a year, rose a modest 1.4 percent, slightly better than analysts' estimates. Wal-Mart, which predicted a much stronger April, fell 31 cents to $46.56.

Bulk retailer Costco Wholesale Corp. added $1.45 to $56.59 as the company saw its monthly same-store sales rise 7 percent, better than the 5.9 percent increase expected on Wall Street. The company also said it would increase annual membership fees by $5.

Same-store sales at clothing retailer Gap Inc. tumbled 13 percent, far worse than the 7.3 percent drop analysts had predicted. Gap fell 9 cents to $18.57.

3M Co. climbed $3.92, or 5.1 percent, to $81.38 after the company lifted its first-quarter earnings forecasts due to strong sales in its industrial, consumer, safety and electronics businesses. The company's current outlook is 3 to 4 cents higher than Wall Street's estimates.

Declining issues outnumbered advancers by about 9 to 7 on the New York Stock Exchange, where preliminary consolidated volume came to 2.36 billion shares, compared to 2.44 billion traded yesterday.

The Russell 2000 index of smaller companies fell 0.03, practically flat, to 766.23.

Overseas, Japan's Nikkei stock average surged 1.42 percent. Britain's FTSE 100 rose 0.03 percent, Germany's DAX index rose 0.04 percent, and France's CAC-40 gained 0.03 percent.