Crude oil rose 2.2 percent to more than $104 a barrel, its highest level since September 2008, after fighting in Libya escalated. Markets have been rattled over the past two weeks as higher oil prices threaten to undermine the economic recovery by increasing transportation and production costs.
Higher energy prices sent stocks lower despite news that the U.S. job market is improving. The Labor Department reported that unemployment rate dipped to 8.9 percent from 9 percent the previous month. The rate has dropped for three months in a row and is now at its lowest level since April 2009. Employers added 192,000 jobs in February, in the range of what economists expected.
"They're tugging at each other, employment and oil," said Jack Ablin, chief investment officer of Harris Private Bank. "Oil is high enough that it has to be a concern. The longer it remains at this level the greater the chance that it upends our recovery."
Stock indexes were heading for their second straight week of losses. The Dow Jones industrial average dropped 137 points, or 1.1 percent, to 12,121 in afternoon trading. The Standard & Poor's 500 index fell 14, or 1.1 percent, to 1,316. The Nasdaq composite index fell 21, or 0.8 percent, to 2,777.
All 10 company groups that make up the S&P index fell. Financial companies fell 1.7 percent, the largest drop. Citigroup Inc. fell 3.3 percent and Goldman Sachs Group Inc. fell 1.8 percent, after Bank of America analysts trimmed their earnings forecasts for the two banks. Analysts expect investors to turn more cautious with their cash, which would lead to a drop in the banks' trading revenue.
All 30 stocks that make up the Dow average fell, led by a 2.1 percent drop for General Electric Co. Wal-Mart Stores Inc. had the smallest loss, falling only 0.3 percent. Wal-Mart, the world's largest retailer, raised its annual dividend 21 percent Friday.
The Dow average slumped 323 points over three days last week as the conflict in Libya deepened. Investors worry that the uprisings that have already toppled regimes in Tunisia and Egypt could spread to major oil-producing countries in the region and disrupt the flow of crude.
Bond prices rose, sending their yields lower. The yield on the 10-year Treasury note fell to 3.50 percent from 3.56 percent late Thursday.