Stocks fell Wednesday as Hurricane Rita strengthened over the Gulf of Mexico, boosting crude oil prices and weighing on shares of manufacturers and insurers.

The Dow Jones industrial average (search) and the Nasdaq Composite Index (search) closed at their lowest level in more than two months. The Standard & Poor's 500 (search) is now down for the year.

Stocks slid after oil futures rose as much as $2 a barrel in morning trading. While economists have debated the long-term economic impact of Hurricane Katrina, few have ventured to guess what a hit from another powerful hurricane might mean to long-term oil prices and the economy. Category 5 Rita is expected to make landfall, most likely in Texas, by the weekend.

BP PLC began closing some of its refinery operations Wednesday. A barrel of light crude was quoted at $66.80, up 60 cents, in trading on the New York Mercantile Exchange (search).

"Hurricane Rita, and its corollary affect on energy prices, is moving the market today, no question about it," said William Hummer, chief economist at Wayne Hummer Investments. "Uncertainty is poison for the market."

The Dow ended down 103.49 points, or 0.99 percent, to end at 10,378.03. The S&P 500 was down 11.14 points, or 0.91 percent, to finish at 1,210.20, down 0.14 percent for the year. And the technology-laced Nasdaq was down 24.69 points, or 1.16 percent, to close at 2,106.64.

Avon Products Inc. (AVP) shares plunged almost 12 percent to $27 on the New York Stock Exchange after it became the latest cosmetics company to cut its profit outlook, due in part to Hurricane Katrina aompanies, including Allstate Corp. (ALL), also slid on concerns about Rita's potential for devastation.

"Stocks suffered today as concerns about inflation, higher oil prices, earnings and a new hurricane mounted," said Subodh Kumar, chief investment strategist at CIBC World Markets in Toronto. "The outlook is a bit uncertain, and uncertainty is never good for stocks."

GE shares slid 0.9 percent, or 29 cents, to $33.55 on the NYSE. Allstate shares fell 2.4 percent, or $1.28, to $51.83.

McDonald's Corp. (MCD) stock fell almost 4 percent and ranked as the Dow's biggest percentage decliner after it said it's planning an initial public offering of its popular Chipotle restaurant chain. But McDonald's, the world's largest restaurant company, said it won't pursue a new corporate structure for its real estate assets trust. McDonald's shares declined 3.7 percent, or $1.20, to to $31.42.

Shares of Wal-Mart Stores Inc. (WMT), the world's largest retailer and another Dow component, fell 1.7 percent, or 72 cents, to $42.49. Declines in Wal-Mart helped push an S&P index of retailers down nearly 1.3 percent.

With no significant new economic data released Wednesday, traders focused on Tuesday's
Federal Reserve (search) interest rate hike, which is widely seen as a sign that the Fed is worried about inflation. In its policy notes, the Fed described inflation expectations as "contained' instead of "well-contained."

"It makes me think that the economic risk is more stagflationary than it has been," said Brian Gendreau, investment strategist at ING Investment Management.

The market had been split on whether the Fed would pause its rate hikes in the destructive wake of Hurricane Katrina, but now that it's set a course for a continuation of the rate increases, some investors are beginning to become more concerned about inflation themselves.

Government data emphasizes the "core" rate of inflation; that is, inflation with fluctuations in the cost of energy and food stripped out. But with higher oil prices seemingly here to stay, some on Wall Street are saying that inflation is higher than the government wants to acknowledge.

Tyco International (TYC) shares fell 2 percent, or 57 cents, to $28.28 after it said on Wednesday it will acquire a majority voting interest in Floreane Medical Implants, in a $145 million deal.

The New York Times Co. (NYT) fell $2.13 to $30 after the newspaper company said late Tuesday its third-quarter earnings would miss estimates by a wide margin and the company would cut 500 jobs.

Shipping company FedEx Corp. (FDX) rose $6.15 to $83.15 after it said first-quarter profit rose modestly, weighed down by an accounting charge, while revenue showed solid growth as daily package volume expanded. Setting aside a one-time charge from changing its lease accounting, earnings would have been $1.25 per share, well above analysts' estimates.

Morgan Stanley (MWD) rose 6 cents to $52.46 after the financial company said its profit dropped 83 percent in the third quarter, including a $1 billion charge to write off the value of its aircraft financing business. Without the charge, Morgan Stanley's pretax income beat analysts' estimates.

Trading was heavy on the New York Stock Exchange, with about 1.93 billion shares changing hands, above last year's daily average of 1.46 billion. On Nasdaq, about 1.80 billion shares were traded, below last year's daily average of 1.81 billion.

Declining shares outnumbered advancing stocks by a ratio of about 2 to 1 on the NYSE and by a bit more than 3 to 1 on Nasdaq.

The Russell 2000 index of smaller companies fell 10.69, or 1.62 percent, to 649.94

Overseas, Japan's Nikkei stock average rose 0.37 percent. European stocks slid. Britain's FTSE 100 fell 0.86 percent, Germany's DAX index fell 1.77 percent, and France's CAC-40 fell 1.41 percent.

Reuters and the Associated Press contributed to this report.