Falling oil prices are becoming another sign of investors' deflating hopes for a speedy economic recovery.
Major stock indices skidded 2 percent on Tuesday as crude fell for the fifth straight day and the Dow Jones industrial average fell 161 points to its lowest close since late April.
Lower oil prices can help the economy by reducing costs, but investors are looking to the latest slide as an unwelcome prediction that demand for energy and basic materials will remain weak as the recession lingers.
Trading volume remained light amid a dearth of news about the economy this week and as investors await the beginning of the second-quarter earnings season, which starts Wednesday with Alcoa Inc. but won't pick up speed until next week.
Stocks have drifted lower in recent days as the market's confidence about the economy took hits from a poor jobs report for June, waning consumer confidence and plunging commodities prices.
That stoked fears that the market might have gotten ahead of itself in March and April, when investors sent stocks soaring in hopes that a nearly two-year-long recession will end some time this year. The next guideposts for the market will be the forecasts companies give during earnings reports about how business conditions look for the rest of the year.
"Uncertainty has crept back into the picture," said Carl Beck, partner at Harris Financial Group. "We started to get some data that put a damper on some of the optimism that had been growing about the economic recovery and that sort of put everything on hold until we start hearing from companies."
The Dow fell 161.27, or 1.9 percent, to 8,163.60. It was the lowest finish for the blue chips since April 28.
The broader Standard & Poor's 500 index fell 17.69, or 2 percent, to 881.03, its lowest finish since May 1. The Nasdaq composite index lost 41.23, or 2.3 percent, to 1,746.17, the lowest close since May 27.
Stocks ended mixed on Monday after all the major indexes posted losses last week. The Dow and the S&P 500 have shed about 7 percent since their recent highs on June 12. The Dow is still up 25 percent from a 12-year low hit on March 9 and the S&P 500 index is up 30.2 percent.
Oil tumbled from an eight-month high hit last week on concerns that a weak economy will dampen demand for energy.
Light, sweet crude fell $1.12 to settle at $62.93 a barrel on the New York Mercantile Exchange, helping to send Exxon Mobil Corp. down $1.54, or 2.3 percent, to $66.56. ConocoPhillips lost 84 cents, or 2.1 percent, to $39.99.
Doreen Mogavero, president of brokerage Mogavero, Lee & Co., said thin trading volume meant many investors were standing on the sidelines. She said discussions in Washington and on trading desks about the potential for more government stimulus spending was unnerving.
"Once you start saying this is something we might have to do again, that says it's not working and that's not good," she said.
Disappointing economic news over the last few weeks, culminating in Thursday's worse-than-expected jobs report for June, has undermined investors' belief that the economy would rebound significantly.
Investors are already on edge with corporate results due. Analysts say expectations are still relatively low, so companies could do better than what the market has forecast. At the same time, companies have cut costs dramatically in recent months, which could boost profits.
"Over the next few weeks, we'll get a real sense for whether there are reasons to be optimistic about the business outlook during the second half of 2009," said Michael Sheldon, chief market strategist at RDM Financial.
Despite the overall weakness in the market Tuesday, there was some buying of health care stocks after an analyst said the White House had signaled it would be open to negotiation on a public insurance option in its drive to reform health care, which would benefit managed-care companies.
Aetna Inc. jumped more than 6 percent, adding $1.53 to $25.94. Cigna Corp. rose more than 7 percent, gaining $1.77 to $25.24.
Declining issues outnumbered advancers by more than three to one on the New York Stock Exchange, where consolidated volume came to 4.6 billion shares and was essentially flat with Monday. Light volume can exaggerate market movements.
Bond prices were mostly higher as investors looked for safety. Results from an auction of $35 billion in three-year notes were mixed but demand was decent.
Investors have been worried in recent weeks that the government might have to raise interest rates to entice buyers as it issues massive amounts of debt to fund its stimulus programs. That could drive up borrowing costs. So far though, auctions have been going relatively smoothly.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.46 percent from 3.51 percent late Monday.
The dollar gained against other major currencies. Gold prices rose.
In other trading, the Russell 2000 index of smaller companies fell 9.78, or 2 percent, to 484.25.
Overseas, Britain's FTSE 100 reversed early gains and fell 0.2 percent, Germany's DAX index lost 1.2 percent, and France's CAC-40 fell 1.1 percent. Japan's Nikkei stock average fell 0.3 percent.