Even after the Energy Department said both crude and gasoline inventories in the United States increased last week, oil prices topped $123 for the first time.

Inflation has been a burgeoning concern lately. Oil prices have doubled over the past year, causing gasoline prices to surge further into record terrain and strap debt-laden U.S. consumers with yet another financial burden. Kansas City Federal Reserve President Thomas Hoenig in a speech late Tuesday cited inflation as his main worry.

Ed Peters, chief investment officer at PanAgora Asset Management in Boston, said, "It is going to be a drag if we continue to get rising prices. The oil prices is just symptomatic of a broader trend."

But Stephen Carl, head of equity trading at The Williams Capital Group, said that while rising oil prices appeared to rattle, many had also seen sizable gains from stocks in recent weeks and wanted to preserve their profits.

"Perhaps we fall away here for a few sessions," he said the S&P 500's rebound to the 1,400 level might have been too hasty for some investors.

The Dow fell 167.64, or 1.29 percent, to 12,853.19, after fluctuating in earlier trading.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 19.82, or 1.40 percent, to 1,398.44, and the Nasdaq composite index fell 34.32, or 1.38 percent, to 2,448.99.

Bond prices rose as stocks pulled back. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.87 percent from 3.92 percent late Tuesday.

Light, sweet crude rose $1.51 to $123.35 on the New York Mercantile Exchange.

The dollar rebounded against other major global currencies, and gold prices fell.

Wall Street did get a dose of good news when the Labor Department said labor costs rose at an annual rate of 2.2 percent during the first quarter. That's down from a 2.8 percent rise the previous quarter, suggesting that inflation pressures may be letting up.

Treasury Secretary Henry Paulson said in an interview with The Associated Press on Wednesday that while the worst of the credit crisis might have passed rising gas prices will dampen the benefits from the 130 million economic stimulus checks that the government is distributing.

But there have not been enough strong readings lately to give investors the nudge they need to push the Dow back above the four-month highs it reached last week. Market analyst Edward Yardeni noted that the Dow, the Standard & Poor's 500 index and many key individual stocks are close to their 200-day moving averages.

"Not everybody's a fan of technical analysis, but everyone knows that this is an important technical level," Yardeni said. "We need some really good bullish news to break above that average."

In corporate news, Clearwire and Sprint Nextel Corp. said they are planning to merge their wireless broadband units to create a new $14.55 billion wireless communications company. The new company is getting a $3.2 billion investment from Intel Corp., Google Inc., Comcast Corp., Time Warner Cable Inc. and Bright House Networks.

Clearwire rose 54 cents, or 3.3 percent, to $17 and Sprint fell 17 cents to $9.02.

In earnings news, The Walt Disney Co. reported late Tuesday that profit in the most recent quarter rose 22 percent despite the Hollywood writers' strike. Disney was the biggest gainer among the 30 Dow components, rising 93 cents, or 2.8 percent, to $34.66.

Yardeni noted that while the first-quarter earnings season began several weeks ago with worse-than-expected results from General Electric Co., it ended up bringing decent results, with earnings excluding the financial sector rising close to 10 percent.

"There is a perception in the markets we had a great move here since March, and that we need to take a break from the rally for a while," Yardeni said. "And then we'll be set up for a summer rally."

The Russell 2000 index fell 10.15, or 1.39 percent, to 719.64.

Declining issues outnumbered advancers by more than 2 to 1 on the New York Stock Exchange, where volume came to 800.4 million shares.

Overseas, Japan's stock market rose 0.38 percent. Britain's FTSE index rose 0.74 percent, Germany's DAX index rose 1.16 percent, and France's CAC-40 rose 0.68 percent.

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