Ongoing weakness in the housing market also added pressure after a report showed that national home prices fell 4.1% during the fourth quarter of 2010.
The Dow Jones industrial average (INDU) sank 178 points, or 1.4%. The S&P 500 (SPX) dropped 28 points, or 2.1%, and the tech-heavy Nasdaq (COMP) shed 78 points, or 2.7%. Those were the biggest drops since August for both indexes.
Market strategists seem to agree that the market is due for a short-term pullback given its steady rise since late August, and the spike in oil prices may be the catalyst to trigger that retreat.
Oil prices spiked 6% Tuesday to settle at $95.42 a barrel as the trouble in Libya entered an eighth day. Earlier, oil prices came within $2 of $100 a barrel.
The turmoil in North Africa and the Middle East has roiled world financial markets, with stocks sinking across Asia and markets in Europe under pressure.
"We're facing a fear of the unknown," said Michael Sheldon, chief market strategist at RDM Financial Group. "Investors don't know how serious the political upheaval will become, or how high oil prices may end up going over the next several weeks."
The dollar rose against the euro and the British pound, but was weaker versus the Japanese yen.
The price on the benchmark 10-year U.S. Treasury rose, pushing the yield down to 3.46% from 3.62% late Friday.
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