Oil prices again weighed heavily on the market. A barrel of light crude was quoted at $44.35, up $1.52 cents, on the New York Mercantile Exchange, and traded as high as $44.50 per barrel earlier in the session. Over the past few weeks, drops in stock prices have corresponded almost directly to rising oil prices, which have climbed on terrorism fears.
"We've had some good economic numbers, but with the high price of oil and the terror alert, there's a lot of pressure on the market on a short-term basis," said Joseph Battipaglia, chief investment officer at Ryan Beck & Co. "These oil prices will eat away at consumer confidence, consumer spending and start to affect business decision making."
Investors looked past the Labor Department's report of a drop in weekly first-time jobless claims, waiting to see what clues the jobs creation report would have about economic growth. Last month's report fell markedly short of expectations.
"Investors don't like uncertainty and this situation has clearly made the markets very uncertain," said Marc Pado, U.S. market strategist at Cantor Fitzgerald told CBS MarketWatch.com.
In late afternoon trading, the Dow fell 118.21, or 1.2 percent, to 10,008.30, after slipping below the 10,000 mark earlier in the afternoon. If the Dow were to close at that level, it would be the biggest one-day drop since May 10.
Broader stock indicators also fell sharply. The Standard & Poor's 500 index dropped 13.32, or 1.2 percent, to 1,085.31, and the Nasdaq composite index was down 26.29, or 1.4 percent, at 1,828.77.
Retail sales figures, a barometer of consumer spending, were also under close scrutiny. Major retailers announced mixed sales data Thursday, with many apparel merchants issuing disappointing numbers. Companies including Wal-Mart Stores Inc. and Target Corp. had stronger sales in July that were mostly in line with expectations, but investors were hoping for better news. Wal-Mart fell 87 cents to $52.33, while Target skidded 98 cents to $42.15.
The concern on Wall Street is that the retail numbers reflect consumer distress over rising prices, particularly oil. Higher oil prices could cause inflation as retailers pass higher shipping costs to customers, and curtail consumer spending as Americans pay more for gas.
"A lot of good earnings numbers have come out, but the overriding economics of oil has dwarfed any of the individual company results," said Brian Bruce, director of global investments for PanAgora Asset Management Inc. "I think we need continued positive economic news and a string of small gains. That might get out of this cycle where oil goes up, stocks go down."
Rising oil prices, caused by Russia's oil giant Yukos' tax problems, overshadowed the latest economic data. The Labor Department reported a drop of 11,000 first-time unemployment filings, and said the number of people who continue to receive benefits fell by 35,000 to 2.91 million — down from 3.62 million a year ago.
Goodyear Tire & Rubber Co. was up 27 cents at $11.12 after it swung to a profit in the second quarter on record tire sales. The company posted earnings of 14 cents per share, 6 cents better than analysts' estimates.
Generic drug maker Barr Pharmaceuticals Inc. saw a drop off in second-quarter earnings because of heavy litigation charges. Without the one-time expenses, Barr edged past Wall Street expectations by 2 cents per share. Barr, which gave an improved 2005 outlook, surged $1.40 to $37.12.
Frontier Oil Corp., like many energy companies, showed strong earnings thanks to this year's rise in oil prices. Frontier beat expectations by 25 cents per share, but fell 78 cents to $19.76.
Declining issues outnumbered advancers by more than 9 to 4 on the New York Stock Exchange, where volume came to 1.03 billion shares, compared with 1.05 billion at the same point Wednesday.
The Russell 2000 index of smaller companies was down 8.22, or 1.5 percent, at 534.45.
Overseas, Japan's Nikkei stock average rose 0.5 percent. In afternoon trading, Britain's FTSE 100 closed up 0.1 percent, France's CAC-40 gained 0.4 percent for the session, and Germany's DAX index climbed 0.1 percent in late trading.