NEW YORK (CNN/Money) -
Stocks tumbled Monday amid a 7 percent spike in crude oil prices and revived worries about inflation ahead of Tuesday's Fed policy meeting.
As of 5:30 p.m. ET, Nasdaq and S&P futures pointed to a modestly lower open for stocks, when fair value is taken into account.
The Dow Jones industrial average (down 84.31 to 10,557.63, Charts) lost 0.8 percent, according to early tallies.
The Nasdaq composite (down 15.09 to 2,145.26, Charts) and the Standard & Poor's 500 (down 6.89 to 1,231.02, Charts) index both saw a slightly smaller decline.
"You're seeing a knee-jerk reaction to the tremendous gain in energy prices," said Donald Selkin, director of research at Joseph Stevens. "It's also a reaction to the contrived gain on Friday," he said, referring to Friday's quarterly-options fueled rally.
"A lot of stocks that depend on energy are getting killed, and few stocks outside of oil, copper and platinum are making new highs," he added.
The surge in energy prices and the renewed focus on inflation make it clear that the Fed will need to raise interest rates Tuesday for the 11th consecutive session, he added.
U.S. light crude oil for October delivery jumped $4.39 to settle at $67.39 a barrel on the New York Mercantile Exchange as Tropical Storm Rita headed toward the Gulf Coast. Also affecting the oil market are indications that OPEC ministers -- meeting Monday -- are unlikely to boost production quotas.
COMEX gold rose $7.10 to settle at $470.40 an ounce as investors poured money into the safe-haven commodity. Prices for Treasury bonds, another perceived haven for investors, also rose.
In addition to the Fed meeting, Tuesday brings reads on housing starts and building permits, as well as earnings from Circuit City and Goldman Sachs.
Looking to the Fed
Investors were also focused on Tuesday's Fed policy-setting meeting. The central bank is still expected to continue its 15-month interest-rate hike campaign.
Previously, for the first time in a while, there was some question as to whether the bankers would opt to pause amid the impact of Hurricane Katrina. At the very least, the Fed was expected to signal that a pause was on the way in the language of its statement.
However, that is looking less likely.
"The Fed will almost certainly raise rates tomorrow," said Paul H. Levine, president at money manager Lifetime Financial Strategies. "They'll have to due to the rise in inflation."
A rise in interest rates tomorrow might not be a bad thing for the market, Joseph Stevens' Selkin said, as it would potentially reassure investors that the Fed is on top of the inflation problem.
On the move
Stock declines were broad-based, with 27 out of 30 Dow issues falling.
McDonald's (down $0.74 to $33.50, Research), General Motors (down $1.17 to $31.31, Research) and Honeywell (down $0.99 to $38.30, Research) were the biggest Dow 30 decliners.
eBay (down $0.17 to $36.93, Research) slipped after Bear Stearns downgraded the online auctioneer to "peer perform" from "outperform."
A variety of chip stocks slipped, dragging the Philadelphia Semiconductor (down 6.63 to 468.14, Charts) index down 1.4 percent.
Chip decliners included Advanced Micro Devices (down $0.31 to $22.34, Research), Teradyne (down $0.45 to $15.83, Research) and Micron Technologies (down $0.35 to $12.46, Research).
On the upside, Nike (up $4.99 to $83.45, Research) jumped about 5 percent after higher quarterly earnings that topped estimates.
Additionally, oil services stocks benefited from the rise in the raw commodity. The Philadelphia Oil Services (Charts) sector index jumped 3.2 percent.
Oil stock gainers included Exxon Mobil (up $0.93 to $64.63, Research), Chevron (up $0.93 to $64.31, Research) and Occidental Petroleum (up $2.25 to $88.80, Research).
Market breadth was negative. On the New York Stock Exchange, losers beat winners by 11 to five on volume of 1.55 billion shares. On the Nasdaq, decliners topped advancers two to one as 1.60 billion shares changed hands.
Treasury prices rose, lowering the yield on the 10-year note to 4.24 percent from 4.27 percent late Friday. Treasury prices and yields move in opposite directions.
The dollar gained versus the euro and the yen.