Stocks Fall as Oil Prices Surge

Stocks fell Wednesday, with the blue-chip Dow average retreating 1 percent, as crude prices settled at a record high above $61 a barrel and overshadowed a report showing strong growth in the U.S. service sector.

The Dow Jones industrial average (search) dropped 101.12 points, or 0.97 percent, to end at 10,270.68. The Standard & Poor's 500 Index (search) fell 10.05 points, or 0.83 percent, to finish at 1,194.94. The technology-laced Nasdaq Composite Index (search) shed 10.10 points, or 0.49 percent, to close at 2,068.65. The Dow slid 1 percent briefly before recovering.

"It's a very skittish market, with crude trading above $60 a barrel," said Michael Driscoll, senior managing director and listed trader at Bear Stearns, in New York.

Fears that storms in the Gulf of Mexico and Caribbean would affect oil rigs in the areas inflamed worries over oil supplies, as did storm-related interruptions at five Louisiana refineries. During regular trading on the New York Mercantile Exchange (search), August crude hit an all-time high of $61.35 a barrel -- the highest price since oil futures began trading on the NYMEX 22 years ago. Light crude settled at $61.28, up $1.69.

Rising oil prices tend to weigh on stocks because they raise corporate costs for everything from trucking services to many industrial chemicals and also eat into consumers' discretionary spending by driving up gasoline prices.

Worries about the storm's effect also drove down the shares of several major oil companies, including Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), which hurt the S&P 500. Shares of energy-sensitive industrial companies, including Caterpillar Inc. (CAT) and United Technologies Corp. (UTX) also fell, weighing the Dow Jones industrial average.

The Institute for Supply Management's (search) services index for June came in at 62.2, higher than the 58.9 reading economists had expected and better than May's 58.5 reading.

A number above 50 indicates growth in the sector that accounts for about 80 percent of the U.S. economy and includes areas such as restaurants, hotels and airlines.

"Its a fairly strong report ... It just confirms what I think the general expectation was, that the economy is in pretty good shape," said Joe Liro, economist and market strategist at Stone & McCarthy Research Associates.

Optimism about the U.S. economy pushed the dollar to an 11-month high against the Japanese yen. The greenback also made gains against the euro and other major currencies. Gold prices rose.

Darden Restaurants Inc. (DRI) shares slipped 3.2 percent, or $1.23, to $31.76, while IHOP Corp. (IHP) fell 4.6 percent, or $2, to $41.40, and Ruby Tuesday Inc. (RI) dropped 3.7 percent, or $1, to $25.80, all on the NYSE. California Pizza Kitchen Inc. (CPKI) was off 1.4 percent, or 37 cents, at $26.54, and Rare Hospitality International Inc. (RARE) dropped 4.6 percent, or $1.40, to $29.35, both on Nasdaq.

PacifiCare Health Systems (PHS) surged $4.41 to $77.09 after the company confirmed it would be acquired by UnitedHealth Services Inc. (UNH) in a $8.1 billion cash-and-stock deal. It was the second-biggest acquisition ever recorded in the healthcare sector. UnitedHealth added 27 cents to $53.50.

American International Group Inc. (AIG) named former Securities and Exchange Commission Chairman Arthur Levitt as a special adviser to the board of directors as the company struggles to emerge from an accounting scandal. after the U.S. Army awarded the company a $4.97 billion contract to provide logistics support in Iraq.The contract is $1 billion more than the previous year.

General Motors Corp. (GM) won a $253 million judgment from the federal government in connection with an underfunded pension plan, The Wall Street Journal reported, though the government is likely to appeal. GM dropped 58 cents to $34.22.

Regional bank Zions Utah Bancorp (ZION) lost $4.69 to $68.67 after it announced it would buy Texas bank Amegy Bancorp Inc. for $1.7 billion in cash and stock, or $23.32 per share. Amegy fell $1.05 to $21.93.

Declining issues barely outnumbered advancers on the New York Stock Exchange, where volume came to 147.32 million shares, compared with 148.17 million traded at the same point on Tuesday.

The Russell 2000 index of smaller companies was down 4.96, or 0.76 percent, at 648.27.

Overseas, Japan's Nikkei stock average fell 0.11 percent. In Europe, Britain's FTSE 100 was up 0.76 percent, France's CAC-40 gained 0.64 percent for the session, and Germany's DAX index rose 0.26 percent.

Reuters and the Associated Press contributed to this report.