- Associated Press - Tuesday, February 22, 2011

NEW YORK (AP) — Stocks fell sharply and oil prices spiked to their highest level in two years Tuesday as the unrest in Libya worsened.

Oil prices jumped 5 percent to $95 a barrel Tuesday. The fight between protesters and forces loyal to the Libyan leader Moammar Gadhafi threatens the country’s oil production. Libya is the world’s 18th largest oil producer, accounting for 2 percent of global daily output. It also sits atop the largest oil reserves in Africa.

The Dow Jones industrial average sank 176 points, or 1.4 percent, to 12,215 in afternoon trading. Bond prices rose, sending their yields lower, as investors sought safety.

At least 250 people have been killed in Libya so far, according to the U.N. Office of the High Commissioner for Human Rights. Key government officials have resigned and air force pilots have defected following a crackdown on protests in Tripoli, Libya’s capital.

Among traders, the main worry is that unrest will spread to other oil-rich countries in the Middle East and North Africa. Protests toppled longtime dictators in Libya’s neighbors Tunisia and Egypt in the past month, and protests are continuing in Yemen and Bahrain.

Jim Ritterbusch, an energy analyst, said a “fear premium” has added about $10 a barrel to oil prices in recent days. Prices could tumble once the region settles down, he said.

Oil producers rose with the prospect of a drop in oil supply. Chevron Corp. gained 2.5 percent, the largest gain among the 30 large companies that make up the Dow Jones industrial average. Exxon Mobil Corp. rose 1.5 percent.

Higher fuel costs hurt airline stocks. Delta Air Lines Inc., American Airlines parent AMR Corp., United Continental Holdings Inc. and US Airways Group Inc. all dropped by 6 percent or more.

The Standard & Poor’s 500 index fell 26, or 2 percent, to 1,316. The Nasdaq fell 70, or 2.5 percent, to 2,763.

Investors drove into the relative safety of Treasurys, pushing their prices higher and lowering their yields. The yield on the 10-year Treasury fell to 3.47 percent from 3.59 percent late Friday.

Brian Bethune, an economist at IHS Global Insight, said a $10 rise in the price of oil subtracts roughly 0.4 percentage point from economic growth. An increase to $150 or $160 a barrel could knock the economy into a recession, Bethune and other economists say.

Higher oil prices also pinch U.S. consumers by pushing up the price of gas. Alan Gayle, senior investment strategist for RidgeWorth Investments, said the deepening unrest in the Middle East is bringing back concerns that crude oil prices could surge.

“This puts a damper on consumer optimism, which is really critical at this stage of the recovery,” Gayle said.

Wal-Mart Stores Inc. fell 3 percent after revenue at stores open at least a year fell for the seventh straight quarter. That raised worries about the company’s ability to turn around its U.S. business this year.

Barnes & Noble Inc. fell 10 percent after the bookseller said its net income fell 25 percent. The company also suspended its dividend and said it would not forecast its fourth-quarter or full-year earnings following last week’s bankruptcy filing by Borders Group.

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