Stocks Pull Back as Inflation Fears Mount

Stocks fell Tuesday as Wall Street continued to worry that recent sharp gains in oil and other commodity prices would lead to higher inflation and interest rates, putting a dent in consumer and corporate spending.

Crude futures hit a seven-month high in New York trading as tensions escalated over Iran’s nuclear program. Some analysts said oil prices could climb as high as $100 a barrel, further rattling investors.

“A combination of factors ranging from the recent rise in oil prices to concerns over earnings and overall higher [interest] rates caused a pullback in stocks,” said Peter Boockvar, equity strategist at Miller, Tabak & Co.

Some market watchers were hoping stocks would get a boost from Alcoa’s positive earnings report after the closing bell Monday, and the market rallied briefly in the early going.

But news that former Iranian President Hashemi Rafsanjani had said that Iran is producing enriched uranium, which the United States and other nations fear will be used to make nuclear weapons, sparked a rally in the oil market.

The near-month crude contract climbed to $69.25 a barrel -- within striking distance of its all-time closing price of $69.81, reached amid the destruction of Hurricane Katrina -- before ending the day up 24 cents at $68.98.

As other commodities such as gold and copper rise along with energy futures, the risk of higher prices being passed to consumers has investors again worried about more interest rate increases from the Federal Reserve, said Jay Suskind, head trader for Ryan, Beck & Co.

Higher commodity prices “would certainly seep through the economy,” he said, “and the Fed is going to hike rates to keep that inflation under control.”

Investors see the Fed’s key interest rate -- the federal funds rate -- going up to at least 5% from the current 4.75%, dampening economic growth and tempting yield-hungry investors to pull money out of stocks.

The Dow Jones industrial average was off as much as 88 points before rebounding to end down 51.70 points, or 0.5%, at 11,089.63. The broader Standard & Poor’s 500 index fell 10.03 points, or 0.8%, to 1,286.57, while the Nasdaq composite lost 22.92 points, or 1%, to 2,310.35.

Losers outnumbered winners by almost 3 to 1 on the New York Stock Exchange and more than 2 to 1 on Nasdaq.

The tech-heavy Nasdaq has lost about 2% since Thursday, its steepest slide in almost two months. Among the leading decliners on Nasdaq were Internet stocks such as Google, which fell $6.72 to $409.66, and semiconductor shares such as Applied Materials, which lost 18 cents to $17.51.

Indexes of smaller stocks, which have been market leaders in recent years, suffered even heavier losses. The Russell 2,000 index slid 10.84 points, or 1.4%, to 742.11.

Companies are just beginning to report earnings for the first three months of the year. On Tuesday, biotech firm Genentech reported after the bell that first-quarter profit rose on strong sales of Avastin and its other cancer medicines.

But after rising $1.07 to $81.70 in regular trading, shares of the South San Francisco company slid more than 2% after hours in reaction to negative comments from an analyst.

In other market highlights:

* Stocks also were sharply lower in Europe on energy cost concerns. Germany’s main index sank 1.6% and the French market tumbled 1.5%.

The Italian market slumped 2.2% on fears that a razor-thin election victory for Romano Prodi’s center-left coalition would not allow him to push through unpopular economic reforms.

* Bond yields fell as some investors opted to play it safe amid concerns about Iran and the Middle East. The 10-year Treasury note yield dropped to 4.92% from 4.95% on Monday.

* Shares of insurer AIG fell 80 cents to $63.45, reflecting concerns about rising rates.

* Positive comments from Citigroup lifted Dow component Caterpillar, boosting shares of the heavy equipment maker $1.21 to $76.66.

* Near-month gold futures, after approaching $600 an ounce in New York on Monday, dipped $2.40 to $595.20 an ounce.