Stocks fell sharply Friday as oil prices spiked to $40 a barrel for the first time since 1990 and a stronger-than-expected jobs report for April stoked fears of an early interest rate hike by the Federal Reserve.

The Dow Jones industrial average (searchslid 123.92 points, or 1.21 percent, to 10,117.34. The S&P 500 Index (searchslipped 15.30 points, or 1.37 percent, to 1,098.69. The Nasdaq Composite Index (searchfell 19.78 points, or 1.02 percent, to 1,917.96, based on the latest figures.

All three stock indexes dropped for the second straight week. The blue-chip Dow fell 1.06 percent, while the broad S&P 500 shed 0.78 percent, and the tech-laden Nasdaq dipped 0.11 percent.

Surging oil prices, driven higher by worries persistent tensions in the Middle East could disrupt supply, kept the stock market under pressure, along with interest rate-sensitive sectors like car makers, home builders and financial services.

U.S. employment surged for a second straight month during April, adding another 288,000 to payrolls, as jobs were created in nearly every sector at a pace that handily outstripped expectations, the Labor Department (search) said.

In addition to the surprisingly robust job growth, the unemployment rate dipped to 5.6 percent. Wall Street economists had forecast 173,000 new jobs would be created in April and the unemployment rate would be unchanged at 5.7 percent.

The jobs data gave further credence to predictions that the Federal Reserve (search) would hike the benchmark lending rate by at least a quarter percentage point at its next meeting in June. Many analysts expressed frustration that the market's weeks-long angst over rates was distracting investors from a very positive economy and strong corporate earnings.

"Eventually, we're going to have to come to the realization that the reason rates are rising is because of solid economic growth," said Chris Conkey, deputy chief investment officer at Evergreen Investments. "The Fed has clearly indicated that they're going to raise rates, and maybe that will let us start the transition into other opportunities."

The government also revised up its estimates for job creation in both February and March, adding to evidence an improving labor market may take some sizzle from the jobs issue ahead of November presidential elections. The back-to-back monthly gains in March and April were the strongest in four years, the government said.

"Clearly the April employment report was significantly stronger than most estimates. There's no reason to believe now this economy is not expanding at a very healthy pace," said Brian Bush, research director at Stephens Inc. in Little Rock, Ark.

"The debate is shifting from a discussion of the timing of an interest rate hike, to a discussion of the magnitude. It's that fear of how much rates will go up that's really driving the stock market," Bush said.

At its meeting Tuesday, the Fed promised to take a "measured" approach to raising interest rates from their 46-year low of 1 percent, but with more money in the hands of consumers, thanks to better employment, inflation could become an issue sooner than expected.

However, the Fed will likely remain cautious about raising rates too quickly, given the election year as well as the impact multiple rate hikes would have on the cost of corporate borrowing, since capital expenditures by companies has traditionally helped fuel economic expansion.

Treasury prices tumbled after the jobs data, with the yield on the benchmark 10-year note jumping above 4.75 percent for the first time since July 2002. The dollar gained strongly against other currencies.

Friday's latest round of corporate earnings were mixed, though overall earnings for the quarter remained strong throughout the market. Martha Stewart Living Omnimedia Inc. (MSO) fell 21 cents per share below analysts' estimates of its quarterly losses, blaming lower advertising revenue and the fallout from Stewart's felony obstruction of justice conviction. Martha Stewart Living lost 61 cents to $9.09.

Spanish-language broadcaster Univision Communications Inc. (UVN) jumped 43 cents to $32.70 after doubling its first-quarter profits from a year ago, based on higher ratings and strong ad revenues.

"Finding Nemo" helped Pixar Inc. (PIXR) find a treasure trove of profits based on DVD sales of the wildly popular film, with Pixar beating Wall Street expectations by 7 cents per share. While Pixar beat Wall Street expectations by 7 cents per share, it nonetheless fell $2.24 to $63.82.

Krispy Kreme Doughnuts Inc. (KKD) blamed the low-carb trend for falling sales of its sugary donuts. The company, which lowered its fiscal 2005 earnings outlook by 10 percent, plunged $9.29, or 29 percent, to $22.51.

Volume was fairly active, with 1.65 million shares changing hands on the New York Stock Exchange, above the 1.4 billion average daily volume for 2003. On Nasdaq, about 1.63 million shares were traded, below the 1.8 billion daily average last year.

Decliners outnumbered advancing stocks by a ratio of about 10 to 3 on the NYSE and by about 3 to 1 on Nasdaq.

The Russell 2000 index of smaller companies slid 14.53, or 2.6 percent, to 548.56.

Overseas, Japan's Nikkei stock average dropped 1.2 percent. Britain's FTSE 100 shed 0.4 percent for the session, France's CAC-40 closed down 0.1 percent and Germany's DAX index fell 0.4 percent.

Reuters and the Associated Press contributed to this report.