A one-two punch of higher oil prices and inflation comments from Federal Reserve Chairman Ben Bernanke sent stocks skidding on Monday. The Dow dropped nearly 200 points, while the Nasdaq slid more than 2 percent.

Wall Street started the day lower after Iran warned it would curtail distribution if Western nations punish or attack the country over its nuclear arms program, unnerving a market already concerned that severe hurricane activity could devastate Gulf Coast refineries again this summer. A barrel of light crude gained 62 cents to $72.60 on the New York Mercantile Exchange.

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The market's swoon deepened after Bernanke told an international monetary conference that inflation remains a concern, even as the economy shows signs of slowing. The Fed chairman said that policy-makers would stay vigilant on rates, which worried Wall Street. Investors have been looking for an indication that a pause in interest rate hikes may be coming.

Bernanke's speech "not only dashes hopes for a pause, but it puts the rate hikes back on the table for the rest of the year," said Barry Hyman, equity market strategist, Ehrenkrantz, King, Nussbaum.

The Dow Jones industrial average ended down 199.15 points, or 1.77 percent, at 11,048.72, its lowest close in nearly three months. The Standard & Poor's 500 Index was down 22.93 points, or 1.78 percent, at 1,265.29. The Nasdaq Composite Index was down 49.79 points, or 2.24 percent, at 2,169.62. Following Monday's decline, its largest since January, the Nasdaq was in negative territory for the year.

The Nasdaq broke below the 2,200 technical level, which analysts said could take the index even lower.

"It looks like a very mixed market; even within sectors, everything is mixed," said Steve Neimeth, senior vice president and portfolio manager at AIG SunAmerica. "With continued evidence that the economy is slowing and higher risk due to oil prices, the market has become increasingly skittish."

The stocks of big manufacturers and other companies seen as more vulnerable to an economic slowdown led the sell-off, with shares of heavy equipment maker Caterpillar Inc. (CAT) and diversified manufacturer 3M Co. (MMM) among the biggest drags on the Dow industrials.

The dollar edged higher after the Fed chief's remarks, while the yield on the 10-year U.S. Treasury note , which moves in the opposite direction of its price, rose to 5.03 percent from about 5 percent before his speech. The note's price fell 7/32.

A report at mid-morning from the Institute for Supply Management added to the picture of weaker growth with news that services sector activity slowed in May, in line with expectations. And the ISM services "prices paid" component jumped, stirring concerns about inflation.

Shares of Caterpillar fell 4.8 percent, or $3.48, to $69.33, while shares of 3M dropped 2.2 percent, or $1.83, to $82.95, both in New York Stock Exchange trading.

Shares of Apple Computer Inc. (AAPL) were the second-worst drag on the Nasdaq. Apple fell 2.7 percent, or $1.66. to $60.

"Technology is having a tough time in terms of providing any leadership," said Kevin Kruszenski, head of listed trading at KeyBanc Capital Markets in Cleveland, Ohio.

The Biotech Index fell 3.6 percent to 645.20 after the U.S. Food and Drug Administration paved the way for multiple sclerosis drug Tysabri to go back on the market, but added several restrictions and safeguards.

Tysabri had been withdrawn last year when it was linked to a rare but potentially fatal brain disease.

Shares of Biogen Idec Inc. (BIIB), the maker of Tysabri, fell 4.9 percent, or $2.32, to $45.39 on Nasdaq, while shares of the distributor, Elan Corp. tumbled 13 percent, or $2.46, to $16.52 on the NYSE.

Trading was active on the NYSE, with about 1.63 billion shares changing hands, above last year's daily average of 1.61 billion, while on Nasdaq, about 1.78 billion shares traded, below last year's daily average of 1.80 billion.

The market's breadth was overwhelmingly negative, with almost four stocks falling for every one that rose on both the NYSE and the Nasdaq.

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Reuters and the Associated Press contributed to this report.