Stocks Take a Tumble

Violence in Iraq and fears of surging oil prices weigh on investors.
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Updated from 11:44 a.m. EDT

Stocks were sharply lower Monday amid geopolitical fears, as the assassination of the president of the Iraqi governing council and rising oil prices weighed on stock markets around the world.

After setting a new intraday low for the year at 1865, the

Nasdaq Composite

still led declines, recently off 23 points, or 1.2%, to 1881. The

Dow Jones Industrial Average

fell 86 points, or 0.9%, to 9927, and the

S&P 500

was down 8 points, or 0.7%, to 1088. The 10-year Treasury note, reprising its role as a safe haven amid world turmoil, was up 16/32 to yield 4.71%, while the dollar was sharply lower against the yen and euro.

The major stock indices were paring heavy morning losses, having reversed when the S&P 500 reached its 200-day moving average of 1080. The bounce also occurred at roughly the same time as a report emerged that a shell containing nerve gas explode in Iraq shortly after its discovery by U.S. troops. Two soldiers were treated for minor injuries.

Monday's losses began with news that the Iraqi governing council president Abdel-Zahraa Othman, also known as Izzedine Salim, was killed, along with three other Iraqis, in a car bombing in central Baghdad. The killing comes about 45 days before the scheduled transfer of power to an Iraqi interim government June 30.

Othman was the second member of the governing council to be killed since it was set up in July.

"As it becomes increasingly clear that Iraq, and the entire Middle East for that matter, is not stable, it will raise questions about oil," said Hugh Johnson, chief investment officer of First Albany. "People like to say that Iraq has a damaging impact on investors' psychology. That may be true, but an even more poignant truth is that it takes a chunk out of the U.S. economy as oil prices rise, and it clouds the outlook for the economy and earnings.

"From a heartless, cold-hearted, dollars-and-cents point of view, it's not about psychology," Johnson added. "It is about the cold, hard facts about the politics of oil. I hate to say it, but that's what it is. That's not to say that that's why we're there. We're there for ideological reasons, but don't kid yourself -- if you work on Wall Street, there's more than ideology at stake here."

Oil futures trading on the Nymex, which have recently soared to record levels, were recently down 38 cents to $41 a barrel.

Overseas, stock markets were selling off, with London's FTSE down 1% to 4398 and Germany's Xetra DAX losing 1.7% to 3739. In Asia, Japan's Nikkei closed down 3.2% to 10,505 and Hong Kong's Hang Seng lost 2.8% to 10,968.

Also, India's stock market suffered the largest loss of its 129-year history, according to the

Associated Press

. The benchmark index of the Bombay Stock Exchange, the Sensex, dropped to 4282.98, down 15.5%, before trading was suspended for the second time of the session as investors panicked amid questions of how communist parties would influence the incoming government of Sonia Gandhi. The index rebounded some after trading resumed for the third time, and the Sensex closed 11.1% lower at 4509.69 after state-run financial institutions were reportedly asked by the India's finance ministry to buy heavily into the market to help reverse the fall.

Also pressuring futures Monday were several reports over the weekend questioning how much the Bush administration knew about the treatment of Iraqi prisoners of war.

The New Yorker

magazine reported that Defense Secretary Donald Rumsfeld encouraged some of the harsh treatment as a means of gathering intelligence. A

Newsweek

story said White House counsel Alberto Gonzales prepared a memo in the aftermath of Sept. 11 that argued that a "new paradigm" of terrorism rendered the Geneva Convention's enemy prisoner provisions "obsolete."

In corporate news, shares of

Lucent

(LU)

dropped 6.7% after the

Wall Street Journal

reported that the SEC would fine the telecom-equipment maker $25 million for not fully cooperating with a an accounting investigation. Regulators will also reportedly charge the company with improper recognition of $1 billion in revenue.

XTO Energy

(XTO)

continued on its recent acquisition binge, agreeing to pay $1.1 billion of natural gas and oil fields from

ChevronTexaco

(CVX) - Get Report

. ChevronTexaco will part with 150 onshore properties in seven U.S. states, most of them in New Mexico and Texas.

Home improvement retailer

Lowe's

(LOW) - Get Report

said first-quarter earnings rose to $455 million, or 57 cents a share, in the first quarter, up from $421 million, or 53 cents a share, last year. Analysts had been forecasting earnings of 54 cents a share in the latest quarter. Lowe's benefited from a 9.9% jump in same-store sales amid strong real estate markets.

Limited Brands

(LTD)

reported a jump in first-quarter earnings that was in line with expectations. The retailer posted adjusted net income of $67.8 million, or 13 cents a share, compared with $49.8 million, or 9 cents a share, in the year-ago period. In its current quarter, the company forecast earnings at the low end of its previous guidance of 23 cents to 26 cents a share.

Also,

Toys R Us

(TOY)

disappointed Wall Street, posting a wider first-quarter loss due to weakness at its U.S. toy stores. It posted a loss of $28 million, or 13 cents a share, compared with a loss of $26 million, or 12 cents a share, in the same quarter last year.