Stocks fell sharply Thursday as oil prices around the $60 level prompted a selloff in a battered transportation sector that spread to the rest of the market.

The Dow Jones industrial average (search) was down 166.49 points, or 1.57 percent, to close at 10,421.44. The Standard & Poor's 500 Index (search) was down 13.15 points, or 1.08 percent, to end at 1,200.73. The technology-laced Nasdaq Composite Index (search) was down 21.37 points, or 1.02 percent, to close at 2,070.66.

U.S. crude futures on the New York Mercantile Exchange (search) rose $1.91 to $60 a barrel, bringing gains this year to nearly 40 percent, before settling up $1.33, or 2.3 percent, at $59.42.

$60 is the highest price for a nearest-delivery month futures contract since NYMEX started crude futures trading in 1983.

"We always wondered what $60 a barrel oil would cost us, and now we know," said Jeff Kleintop, chief investment strategist for PNC Financial Services Group in Philadelphia. "On top of that, you've got news from FedEx, a transportation company, saying, 'Yeah, oil is hurting us.' That's got the market shaken up a bit."

FedEx Corp. (FDX) , the world's largest air-express carrier, and trucking company Covenant Transport Inc. offered forecasts well below Wall Street estimates, citing high fuel costs. FedEx sank 8.3 percent, or $7.35, to $80.77 on the NYSE and Covenant fell 5.6 percent, or 72 cents, to $12.22 on Nasdaq.

Shares of Dow component and package delivery company United Parcel Service Inc. (UPS) fell nearly 3 percent to $68.26.

"We've definitely seen FedEx have an effect on the rest of the sector and spill out into the wider market," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "I think you'll want to keep a close eye on stocks for the short-term and weigh any new purchases very carefully."

Shares of Dow industrial companies that are benchmarks of the U.S. economy fell on the back of high oil prices, with Caterpillar Inc. (CAT), a heavy equipment-maker, down 2 percent to $98.47 and diversified manufacturer 3M Co. (MMM), down 12.6 percent to $75.87.

Good unemployment news appeared to mitigate the losses in early trading. The Labor Department (search) reported the number of first-time jobless claims fell to 314,000 last week, less than the 330,000 economists expected and down from 334,000 the previous week.

But in addition to oil, Wall Street was disappointed with comments by Federal Reserve (search) Chairman Alan Greenspan (search), speaking before the Senate Finance Committee. Greenspan said there's "no credible evidence" U.S. manufacturing or jobs would be helped by China revamping its currency system — a disappointment to many hoping that such a move would aid the U.S. economy.

In other economic news, the annual rate of existing home sales fell slightly in May, to 7.13 million homes, slightly off the 7.18 million pace recorded in April, according to the National Association of Realtors.

The surge in oil prices have kept the market from building on last week's gains and deepened investors' concerns over whether the May-June rally stocks have enjoyed would ultimately be curtailed. Some investors also kept to the sidelines ahead of the Fed's decision on interest rates next Thursday and the usual end-of-quarter volatility expected next week.

Soaring energy prices also hurt discount chains because the stores cater to low-income shoppers who are spending a larger portion of their budgets on gasoline. Shares of Dow component Wal-Mart Stores Inc. (WMT), the world's biggest retailer, slipped 1.9 percent, or 91 cents, to $47.88 and Target Corp. (TGT), the No. 2 U.S. discount retail chain, fell 1.6 percent, or 90 cents, to $55.03.

Del Monte Foods Co. (DLM) dropped 49 cents to $10.36 after it reported a 66 percent drop in quarterly profits, blaming high raw material and transportation costs — again, with fuel prices partially to blame — for the fall. The company missed Wall Street's estimates by 22 cents per share.

General Electric Co. (GE) skidded 84 cents to $34.66 after the Dow component announced a reorganization that would consolidate its 11 business divisions into six groups, saving up to $300 million. The conglomerate also reaffirmed its second quarter and full year profit estimates, and promised double-digit profit growth in 2006 and beyond.

Shares of Bed Bath & Beyond Inc. (BBBY) fell more than 5 percent to $41.96 despite reporting better-than-expected earnings. Brokerage Raymond James said in a note released on Thursday "investors will find (Bed Bath & Beyond's) operating results modestly disappointing."

Shares of Merck & Co. (MRK) dropped 2 percent to $31.25 after an Associated Press report that said researchers sought to reformulate the arthritis drug Vioxx five years ago to reduce its cardiovascular side effects, even as the company played down data showing potential heart attack risk.

BlackBerry maker Research In Motion Ltd. (RIMM) rose 2.3 percent to $80.17 on a key favorable patent ruling.

Decliners outnumbered the advancers on both the New York Stock Exchange and the Nasdaq by about 2 to 1 in active trading. On the NYSE, 1.57 billion shares changed hands, above the 1.46 billion daily average for last year, while on Nasdaq, about 2.06 billion shares traded -- above the 1.81 billion daily average last year.

The Russell 2000 index of smaller companies was down 9.33, or 1.45 percent, at 634.12.

Overseas, Japan's Nikkei stock average rose 0.26 percent. In Europe, Britain's FTSE 100 was up 0.3 percent, Germany's DAX index gained 0.17 percent, and France's CAC-40 climbed 0.25 percent.

Reuters and the Associated Press contributed to this report.