Stocks fell sharply Thursday after Hewlett-Packard Co. (HPQ) warned that its profit for the current quarter would fall short of Wall Street expectations and oil prices surged past $45 per barrel.

The Dow Jones industrial average (searchended down 123.73 points, or 1.24 percent, at 9,814.59. The Standard & Poor's 500 Index (searchfell 12.56 points, or 1.17 percent, at 1,063.23. The technology-laced Nasdaq Composite Index (searchlost 29.93 points, or 1.68 percent, at 1,752.49.

The combination of bad news sent the Nasdaq to its lowest close since Aug. 18, 2003, while the S&P closed at its lowest level since Dec. 10, 2003. The Dow also hit a new low for the year, notching its lowest close since Nov. 28, 2003.

"We are seeing the cumulative effect of Hewlett-Packard, higher oil, higher rates, not such a great third-quarter outlook for companies and then the general economic numbers," said Brian Williamson, vice president of equity trading at The Boston Co. Asset Management.

Hewlett-Packard, a Dow component, was the latest in a string of technology companies to disappoint Wall Street with second-quarter earnings. Like Cisco Systems Inc. (CSCO) and National Semiconductor Corp. (NSM) earlier this week, H-P said its third quarter would be grim.

In the meantime, crude prices surged past the $45 per barrel mark, trading at $45.50, up 70 cents, on the New York Mercantile Exchange (search). That raised concerns that the Federal Reserve (search), which hiked interest rates to 1.5 percent on Tuesday, would have to be aggressive in further rate increases to combat inflation — at the same time that earnings growth and the economy is slowing down.

"Obviously, oil prices are spooking the market," said Peter Cardillo, chief strategist and senior vice president at S.W. Bach & Co. "I think, based on today's fundamentals, the market is very cheap and oversold. Unfortunately, oil is hanging over everything."

Prices are being driven up by economic demand and supply worries linked to the Middle East, Venezuelan politics and the travails of Russia's Yukos.

On the U.S. economic front, a report showed the number of Americans filing first claims for jobless pay dropped by 4,000 last week, a second straight weekly decline that appeared to reflect improving job prospects.

"Obviously the market is still feeling stressed from higher energy prices," said Phil Flynn, vice president and senior market analyst at Alaron Trading Corp. "The better than expected jobless claims number gives optimism that we may see another surge in spending next month because if the job market continues to improve, the bulk of the consumers can better withstand these high energy costs."

Rising petroleum costs helped push prices for goods imported into the United States higher during July, reversing a one-month dip in prices during June, another report showed.

U.S. shoppers returned to stores in July, but retail sales for the month posted a smaller-than-expected gain as consumers coped with the recent rises in energy prices, according to a third report released by the Commerce Department (search).

Hewlett-Packard's problems were due to corporate spending. The company blamed "execution issues" in its corporate and enterprise sales divisions, and said it would make management changes immediately. HP, which missed estimates by 7 cents per share, plunged $2.57, or 13 percent, to $16.95.

Rival computer maker Dell Inc. (DELL) was down 45 cents to $33.12 as Wall Street waited for its earnings report. After the session, Dell announced that it exceeded its year-ago earnings by 7 cents per share, sending its stock 60 cents higher to $33.72 in after-hours trading.

Closely watched retailers Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) both released earnings Thursday that beat Wall Street estimates. Wal-Mart, which earned a penny per share more than expected, said it was concerned about increased shipping prices due to fuel costs, but gave an otherwise upbeat assessment. Wal-Mart rose $1.02 to $52.65.

Target gained $1.48 to $41.90 after it also surpassed estimates by a penny per share before one-time charges and benefits. The sale of its Marshall Field's stores to May Department Stores Inc. helped to nearly quadruple its profits for the quarter.

The Russell 2000 (search) index of smaller companies was down 9.53, or 1.8 percent, at 517.10, also a new low for the year to date.

Overseas, Japan's Nikkei stock average fell 0.2 percent. In Europe, Britain's FTSE 100 closed up 0.4 percent, France's CAC-40 slipped 0.3 percent for the session, and Germany's DAX index dropped 0.6 percent in late trading.

Reuters and the Associated Press contributed to this report.