Microsoft had offered $47.5 billion to buy Yahoo Inc., but scrapped the bid late Saturday after the software maker and the Internet provider could not agree on a sale price. The failed deal came as a disappointment to Wall Street, as merger-and-acquisition activity tends to boost shareholder value, and also signals to the broader market that corporate America is optimistic about the future.

A jump in oil prices raised concerns that inflation could force consumers, who account for more than two-thirds of the economy, to cut their spending on discretionary items. Crude oil futures for June delivery surged to a new trading high of $120.36 a barrel on the New York Mercantile Exchange before pulling back to settle up $3.65 at a record $119.97. The jump followed worries over supply disruptions in areas such as Nigeria, Iran and Iraq.

"Energy is a very important piece," said Russell Croft, portfolio manager at Croft Leominster Investment Management in Baltimore, referring to the mood of both investors and consumers. "It's the price at the pump, it's what people read about."

Concerns about the impact of energy prices had slipped to the background on Wall Street in recent weeks, as investors focused more on earnings, the economy and on what the Federal Reserve might do about interest rates. When the Fed cut rates by a quarter point last Wednesday, it reminded Wall Street that inflation remains a priority along with the uncertain economy.

There is a growing sense on Wall Street that the Fed is in the process of putting its rate cuts on hold, and accelerating inflation would make such a pause more likely.

The Dow Jones industrial average fell 88.66, or 0.68 percent, to 12,969.54.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 6.41, or 0.45 percent, to 1,407.49, while the Nasdaq composite index fell 12.87, or 0.52 percent, to 2,464.12.

Bond prices rose as stocks declined. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.84 percent from 3.86 percent late Friday. In late trading, however, bond prices declined, and the 10-year yield rose to 3.87 percent.

Gold prices also climbed and the dollar traded mixed against other major currencies.

John Merrill, chief investment officer at Tanglewood Capital Management in Houston, noted that despite investors' concerns about the economy, Wall Street has logged a sizable rebound since its March lows. He said the back-and-forth in stocks is to be expected, particularly after recent gains.

Last week, the Dow rose 1.29 percent, while the S&P 500 advanced 1.15 percent.

"The market can only go in one direction for so long before you just have to change," he said.

"Our idea is that we're in a long, soft patch," Merrill said. "The economic problems we have with homebuilding and the over-leveraged consumer and the over-leveraged banking system - they are problems that are going to be with us for a while."

Despite their concerns about inflation, investors briefly took some encouragement from a key reading on the U.S. service sector. The Institute for Supply Management said its April index of nonmanufacturing activity rose to 52 from 49.6 in March. A reading above 50 signals economic expansion; analysts had expected the figure would come in at 49.3, according to economists surveyed by Thomson Financial/IFR.

But the rise in oil prices still weighed on a number of sectors, including retailers whose livelihood depends on consumers and airlines whose profits are hurt by more expensive fuel. Macy's Inc. fell $1.21, or 4.6 percent, to $25.09, while J.C. Penney Co. fell $1.86, or 4.1 percent, to $43.32.

Delta Air Lines Inc. fell 39 cents, or 4.6 percent, to $8.11 and Continental Airlines Inc. declined $1.01, or 5.4 percent, to $17.78.

Meanwhile, Yahoo fell $4.30, or 15 percent, to $24.37 after Microsoft's decision to walk away. Shares of Microsoft slipped 16 cents to $29.08.

Helping to offset some of investors' disappointment over the abandoned Yahoo deal was a report from The Wall Street Journal that Deutsche Telekom AG is considering a bid to buy Sprint Nextel Corp., according to people familiar with the discussions.

Sprint rose 83 cents, or 10.5 percent, to $8.72 on the report and as the newspaper reported that Sprint is considering spinning off its Nextel arm.

Countrywide Financial Corp. fell 62 cents, or 10.4 percent, to $5.36 after a Wall Street analyst said Bank of America Corp. should abandon its proposed takeover of the mortgage lender. Another analyst suggested the deal would likely be renegotiated for a lower price.

Bank of America fell 82 cents, or 2.1 percent, to $38.97.

Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to 3.30 billion shares, compared with 3.86 billion shares traded Friday.

The Russell 2000 index of smaller companies fell 1.39, or 0.19 percent, to 724.35.

Overseas, Japan's and Britain's markets were closed for holidays. Germany's DAX index rose 0.13 percent, and France's CAC-40 fell 0.13 percent.

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Nasdaq Stock Market: http://www.nasdaq.com

(This version CORRECTS oil contract high to $120.36, not $120.21.)

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