Rising oil prices
squelch stock rally

NEW YORK » Oil prices that soared to $65 a barrel choked off an early rally on Wall Street yesterday, pummeling the market's optimism about the economy in the process.

The tech-focused Nasdaq composite index also was hurt by a disappointing forecast from networking gear maker Cisco Systems Inc.

Analysts said investors had begun the day confident that the U.S. economy will stay strong, absorbing both higher short-term interest rates and rising gasoline prices. But the erosion of stocks' early advance -- the Dow Jones industrials had gained more than 100 points, extending a rally from Tuesday -- was proof that many investors remained uneasy and inclined to sell when oil climbs higher.

Crude hit an intraday record of $65 a barrel on the New York Mercantile Exchange before easing to a record close of $64.90, up $1.83 for the day.

The price of oil "clearly is the headline, and that's probably causing the market malaise," said Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago.

The Dow fell 21.26, or 0.2 percent, to 10,594.41.

Broader stock indicators also fell, having given up earlier gains. The Standard & Poor's 500 index fell 2.25, or 0.18 percent, to 1,229.13 and the Nasdaq composite index dropped 16.38, or 0.75 percent, to 2,157.81.

The market initially was buoyed by confidence that the Federal Reserve's decision Tuesday to raise short-term interest rates one-quarter percentage point to 3.5 percent wouldn't harm the economy. The Fed also restated that its interest rate policy is "accommodative" and future rate increases can continue at "a pace that is likely to be measured," suggesting that the economy should continue expanding.

But investors turned around when oil prices resumed their climb despite new estimates from the U.S. Department of Energy of slower growth in world oil demand, which would put less upward pressure on prices.

Investors, already uncomfortable with a series of refinery outages, apparently focused on the department's supply report, which showed a 2.1 million barrel decrease in the nation's supply of gasoline. They repeated a pattern from recent months, setting aside evidence of a strong economy to focus instead on oil's rising price.

Mark Vitner, senior economist at Wachovia Securities in Charlotte, N.C., noted that "it's somewhat surprising how resilient the economy has been, despite higher energy prices."