Down day on Wall Street

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NEW YORK (CNNMoney.com) -- Stocks slumped Monday as oil prices touched a record $120 a barrel, Microsoft abandoned its bid for Yahoo and analysts speculated that Bank of America could renegotiate or walk away from its deal to buy Countrywide Financial.

The Dow Jones industrial average (INDU) fell 0.7%. The broader Standard & Poor's 500 (SPX) index lost around 0.5%. The Nasdaq composite (COMP) lost 0.5%.

After a strong April and start to May, Wall Street was hit Monday with the possible dissolution of several big proposed mergers, raising worries about the health of Corporate America amid the economic slowdown.

Microsoft said Saturday that it was abandoning its sweetened deal for Yahoo and would not pursue a hostile takeover. The talks fell apart over the weekend after Yahoo rejected Microsoft's higher offer.

Shares of Yahoo (YHOO, Fortune 500) slumped 15% and topped the Nasdaq's most-active list. Microsoft (MSFT, Fortune 500) shares slipped modestly.

Although some analysts say the deal could eventually go through, the disintegration was nonetheless a blow to Wall Street. Deals generally tend to lift investor sentiment, as they represent corporate confidence, and a merger at this level would be especially positive for market psychology.

Wall Street also worried about the outlook for Bank of America (BAC, Fortune 500)'s proposed $4 billion bid for Countrywide Financial (CFC, Fortune 500) after two firms issued dour outlooks. A Friedman Billings Ramsey analyst said BofA could walk away from the deal or at least lower its purchase price. Analysts at S&P Equity Research said Monday that they think BofA will complete the deal, but at a lower price.

BofA shares fell 2% and Countrywide shares lost over 10%.

Investors also reacted to record oil prices above $120 a barrel and a retreat in the dollar after the greenback had showed some strength last week.

That turnaround in oil and the dollar after last week was especially concerning, said Joseph Saluzzi, co-head of equity trading at Themis Trading.

"I think people thought we were seeing the start of a downtrend in oil and some strengthening of the dollar last week, and this week it's reversed," Saluzzi said.

In addition, the Microsoft-Yahoo news was dragging on technology, one of last week's best stock performers, he said, adding that tech could rebound or fall more depending on Cisco Systems' earnings report, due Tuesday.

Stocks briefly improved following the morning release of the April ISM services sector index, which rose to 52 from 49.6 versus forecasts for a drop to 49.1. Any reading over 50 indicates expansion in the sector.

Deutsche eyeing Sprint: In other potential deal news, Deutsche Telekom is reportedly considering making a bid for Sprint Nextel (S, Fortune 500), according to published reports Monday. Later in the day, the Wall Street Journal reported that Sprint is considering spinning off or selling its troubled Nextel unit. Sprint fell 10.5%.

Shares of Google (GOOG, Fortune 500) rose 2.3% after a Goldman Sachs analyst boosted its price target, saying that the company could benefit from the fallout from the failed Microsoft-Yahoo deal.

Among other movers, General Motors (GM, Fortune 500) lost 3.6% after workers at its Chevy Malibu plant in Kansas went on strike.

Market breadth was negative. On the New York Stock Exchange, losers topped winners by almost three to two on volume of 1.11 billion shares. On the Nasdaq, decliners beat advancers four to three on volume of 1.72 billion shares.

Commodities: Oil and gold prices climbed, while gas prices eased modestly.

U.S. light crude oil for June delivery jumped $3.65 to set a settlement record of $119.97 per barrel on the New York Mercantile Exchange. Oil - which was up on renewed supply concerns - touched an intraday record of $120.30 a barrel earlier, the first time it has surpassed the $120 mark.

COMEX gold for June delivery rose $16.10 to $874.10 an ounce.

The national average price for a gallon of regular unleaded gas slipped to $3.611 from the previous day's price of $3.614, according to AAA. Last week, gas prices hit a record of $3.623, after hitting all-time highs for 17 straight days.

Other markets: The dollar fell versus the euro after rising against it over the past week. The greenback also slipped versus the yen.

Treasury prices dipped, raising the yield on the benchmark 10-year note to 3.86% from 3.85% late Friday. Bond prices and yields move in opposite directions.