Updated from 4:05 p.m. EDT

Surging oil and evidence of its impact on a handful of transportation companies sent stocks sharply lower Thursday, frustrating traders who tried to take the

Nasdaq

over 2100 for the third time since February.

The

Dow Jones Industrial Average

closed down 166.49 points, or 1.57%, to 10,421.44, weighed down by 2%-plus losses in

General Electric

(GE) - Get Report

,

Hewlett-Packard

(HPQ) - Get Report

,

3M

(MMM) - Get Report

and

Merck

(MRK) - Get Report

. The Dow transportation index fell 3%. The drop was the worst point loss the Dow has suffered since April 15.

The

S&P 500

fell 13.15 points, or 1.08%, to 1200.73, while the Nasdaq lost 21.37 points, or 1.02%, to 2070.66. The 10-year Treasury bond was down 2/32 in price to yield 3.95%, while the dollar was higher against the yen and euro.

Trading volume on the

New York Stock Exchange

was 1.99 billion shares, with decliners beating advancers by a 2-to-1 margin. Volume on the Nasdaq was 2.01 billion shares, with decliners outpacing advancers 2 to 1.

The Nasdaq benefited earlier from strength in a handful of key components, but the rally collapsed as oil spiked $1.33 to close at $59.42 a barrel, briefly reaching a new intraday high of $60.05. Crude oil finished just above the front-month record close set by the since-expired July contract on Monday. Like the action in the Nasdaq, the buying looked mainly technical.

"Oil rekindled fears of energy-related inflation flaring up and slowing economic activity," says Peter Cardillo, chief market analyst with SW Bach & Co. "The fact that oil touched $60 really scared everyone. The real question is if oil will continue to move higher or will it stabilize here for a sustained amount of time. The market needed to trade off of something, with a lack of any market movers out there."

"It does show that oil affects equities, as soon as prices hit $60," says Barry Hyman, equity market strategist with Ehrenkrantz King Nussbaum. "It's not the only news of the day, but it's the predominant one. The market has also faced a pretty severe rotation from value to growth. Blue chips have been suffering."

"The market needs to rebound now, or the move higher that we've seen will be viewed as another false move," Hyman adds.

The other big story in the energy sector was an $18.5 billion bid by China's third-largest oil company,

CNOOC

(CEO) - Get Report

, for

Unocal

(UCL)

. The offer is aimed at derailing

Chevron's

(CVX) - Get Report

$16.5 billion bid, an overture Unocal previously agreed to accept.

CNOOC describes the $67-a-share offer as friendly, all-cash and fully financed. Unocal was higher by 16 cents, or 0.2%, to close at $65.02. Its board said it will evaluate the proposal but, for now, its recommendation that shareholders accept Chevron's bid "remains in effect."

"This is an inevitable consequence of what we're doing in trade," said billionaire investor Warren Buffett in an interview on

CNBC

. "We've bought more goods from the Chinese than we sold to them. If we're going to consume more than we produce, we're going to have to expect to give away a little bit of our country."

"We are going down a path that has long been described as dangerous," added Buffett. "We have gone from a country that owned more in the rest of the world than they owned of us to going about $3 trillion in the hole, and that is not without consequences."

Alan Greenspan and John Snow addressed U.S.-China relations when they testified before Congress Thursday morning. In prepared notes, Greenspan said that "a policy to dismantle the global trading system in a misguided effort to protect jobs from competition would redound to the eventual detriment of all U.S. job seekers, as well as of millions of American consumers."

Greenspan added that "policy should aim to bolster the well-being of job losers through retraining and unemployment insurance, not to stave off job loss through counterproductive efforts to impede the process of income-enhancing international trade and globalization."

In other economic news, the Labor Department said 314,000 Americans filed for first-time jobless benefits last week, about 16,000 fewer than expected. Separately, the National Association of Realtors said that existing-home sales for May fell 0.7% to 7.13 million units. Economists expected a decline of 0.4% to an annual rate of 7.15 million.

General Electric affirmed second-quarter and full-year earnings guidance and outlined an administrative realignment that includes the naming of three new vice chairmen. GE put earnings in the quarter at 43 cents to 45 cents a share and earnings for the year at $1.78 to $1.83. GE lost 84 cents, or 2.4%, to $34.66.

Before the bell Thursday,

FedEx

(FDX) - Get Report

reported fiscal fourth-quarter earnings of $448 million, or $1.46 a share, up from $412 million, or $1.36 a share, a year earlier. Sales rose 10% to $7.72 billion. Analysts expected FedEx to earn $1.48 a share on sales of $7.82 billion, according to Thomson First Call.

FedEx guided lower for the first quarter, saying it now expects earnings in the range of $1.10 to $1.25 a share, with full-year earnings of $5.20 to $5.45 a share. Analysts expect first-quarter earnings to reach $1.26 a share and for the company to post a full-year profit of $5.51 a share. Shares fell $7.35, or 8.3%, to $80.77.

Elsewhere,

Rite Aid

(RAD) - Get Report

slid 9.7% after posting lower earnings year over year, blaming store closing and impairment costs. The retailer posted net income of $33.4 million, or 5 cents a share, falling from $63.7 million, or 10 cents a share, a year ago. Revenue dipped 0.5% to $4.22 billion. The Thomson First Call consensus was for EPS of 2 cents on revenue of $4.26 billion. Rite Aid also guided its 2006 earnings outlook lower. The stock was off 44 cents to close at $4.11.

Graphics card supplier

ATI

(ATYT)

posted a third-quarter loss of $400,000, reflecting stock-option costs and anemic margins in its personal computer division. The company put fourth-quarter sales at $550 million to $580 million, which is below the Thomson First Call consensus estimate of roughly $600 million. ATI lost 98 cents, or 7.7%, to $11.80.

College operator

Corinthian Colleges

(COCO)

cut its fiscal fourth-quarter profit forecast, saying fewer students started classes than it expected. Corinthian said it now expects earnings of 13 cents a share before items, compared with the company's previous forecast of 20 cents to 22 cents a share. Corinthian dropped $2.80, or 17.3%, to $13.39.

After the bell Wednesday,

Bed Bath and Beyond

(BBBY) - Get Report

said first-quarter profit rose 21%, narrowly beating analysts' estimates, thanks to higher sales. The retailer posted earnings of $98.9 million, or 33 cents a share, up from $82.0 million, or 27 cents a share, a year ago. Analysts expected EPS of 32 cents, according to Thomson First Call. Net sales rose 13% to $1.24 billion. Still, the stock fell $2.41, or 5.4%, to $41.96.

Shares of

Ameritrade

(AMTD) - Get Report

and

Toronto-Dominion Bank

(TD) - Get Report

were higher one day after Ameritrade said it will acquire the TD Waterhouse online brokerage unit for $2.85 billion. Ameritrade shares added 38 cents, or 2.1%, to $18.25. Toronto-Dominion was higher by 52 cents, or 1.2%, to finish at $44.67.

In brokerage action, CIBC World Markets upped its stock price target for

Momenta Pharmaceuticals

(MNTA) - Get Report

to $25 from $13 after a U.S. court invalidated

Sanofi-Aventis'

(SNY) - Get Report

patent for a blood-thinning drug, for which Momenta already has a generic formulation. Momenta jumped $2.82, or 16.9%, to $19.50.

Overseas markets were mostly higher, with London's FTSE 100 recently up 0.3% to 5114 and Germany's Xetra DAX adding 0.2% at 4627. In Asia, Japan's Nikkei was up 0.3% overnight at 11,576, while Hong Kong's Hang Seng added 0.2% to 14,190.

To view Aaron Task's video take on today's market, click here

.