Renewed jitters in oil markets weighed on stocks Tuesday despite a forecast-busting U.S. manufacturing survey and few indications from Federal Reserve Chairman Ben Bernanke that he's willing to back higher interest rates anytime soon.
With the crisis in Libya showing few signs of abating and amid fears other oil-rich countries may get embroiled in the turmoil that has swept through the Arab World, crude prices continued to edge higher.
"That continues to unsettle market sentiment," said Neil MacKinnon, global macro strategist at VTB Capital.
By late afternoon London time, a barrel of crude on the New York Mercantile Exchange was trading $1.27, or 1.6 percent higher, at $98.23 a barrel, while the equivalent Brent rate in London spiked $1.98, or 2 percent, to $113.78 a barrel.
Over recent days and weeks, stocks have traded in opposite directions to energy prices. When they rise, investors get worried about the impact on the global economic recovery; when they fall they breathe a sigh of relief that the damage won't be too bad.
In Europe, the FTSE 100 index of leading British shares closed down 1 percent at 5,935.76 while Germany's DAX fell 0.7 percent to 7,223.30. The CAC-40 in France ended 1.1 percent lower at 4,067.15.
On Wall Street, the Dow Jones industrial average was down 0.4 percent at 12,183 around midday New York time while the broader Standard & Poor's 500 index fell 0.5 percent to 1,321.
So far this week, reports that some Libyan ports had reopened to oil tankers and that Saudi Arabia was boosting crude exports softened tensions in oil prices and helped stocks recover their poise.
Events in the Middle East and North Africa will likely remain at the forefront of investors' thoughts, especially if Saudi Arabia faces a popular uprising like the ones that have already deposed the leaders of Tunisia and Egypt and threaten the regime of Moammar Gadhafi in Libya.
If Saudi Arabia, the world's biggest oil exporter, were to become embroiled in a similar situation, then many analysts think oil prices could rise to $200 a barrel, with damaging consequences for the economy. Not only would global growth be hit but inflation would spike up sharply, too.
"Considerable uncertainty remains as to the ultimate impact of the wave of popular protests and how to play this," said Jan Lambregts, head of financial markets research at Rabobank International.
With so much focus on the Middle East and North Africa, a strong U.S. manufacturing survey from the Institute for Supply Management barely registered. Its main index rose to 61.4 in February from 60.8 the previous month. Anything above 50 indicates an expansion in output.
Comments from Bernanke had little impact, too.
In prepared testimony to a Congressional committee, Bernanke expressed confidence that economic growth would increase this year. But he warned it won't be strong enough to quickly lower unemployment, now at 9 percent. He also cited other risks to the economy, including rising prices for oil, gasoline, food and other commodities, and further weakness in home prices.
In the currency markets, the reaction was fairly subdued with the euro trading flat on the day at $1.3815 and the dollar was steady at 81.91 yen.
Earlier in Asia, Wall Street's recovery Monday boosted sentiment with most key benchmarks closed higher.
Japan's Nikkei 225 stock average closed up 1.2 percent at 10,754.03 after fresh data showed the country's jobless rate held steady in January.
Hong Kong's Hang Seng ended up 0.3 percent to 23,396.42 even though heavyweight constituent HSBC Holdings dropped 4.7 percent after disappointing earnings the previous day.
Chinese shares edged higher in cautious trading, after the release of data showing manufacturing slowed last month, suggesting that efforts to rein in inflation may be taking effect. The benchmark Shanghai Composite Index rose 0.5 percent to 2,918.92 while the smaller Shenzhen Composite Index added 0.2 percent to 1,298.97.
Pamela Sampson in Bangkok contributed to this report.