Updated from 4:14 p.m. EDT

Stocks plunged for a second day Thursday as rising tensions in the Middle East pushed oil to an all-time high.

The Dow Jones Industrial Average tumbled 166.89 points, or 1.52%, to 10,846.29, and the S&P 500 dropped 16.31 points, or 1.3%, to 1242.29. The Nasdaq Composite lost 36.12 points, or 1.73%, to 2054.11.

The averages steadily weakened amid a steady stream of news from Israel, where the army has launched raids into Lebanon in an effort to dislodge Hezbollah militants who kidnapped two Israeli soldiers Wednesday. The biggest swoon of the session followed reports that Hezbollah fired a missile into the Israeli port city of Haifa. No injuries were reported.

Over the last two sessions, the Dow has lost 288 points, or 2.6%, and the Nasdaq plummeted 75 points, or 3.5%. The S&P 500 had a two-day decline of 30 points, or 2.4%.

"Investors have worries about earnings, geopolitical stories dominating the headlines and another layer of energy problems," said Barry Hyman, equity market strategist with EKN Financial. "These higher energy prices are enforcing an inflationary story. We're seeing very damaged sectors that are breaking technical levels."

The Philadelphia Semiconductor Sector Index reversed a morning gain and finished down 1.4%. Chipmaker Intel ( INTC) disclosed plans to eliminate 1,000 manager positions as part of a restructuring plan. Intel slid 16 cents, or 0.9%, to $17.72. On Wednesday, a 2.7% drop in the chip group kept tech stocks underwater.

The S&P Retail Index finished down 0.9%, extending Wednesday's 2.5% drop. The Amex Airline Index tumbled 6.1%, the Dow Jones Transportation Average was down 2.7%, and the Nasdaq Biotech Index slid 2%.

Oil surged as Israel bombed Beirut's airport and explosions reportedly closed two pipelines in Nigeria. Reuters was also reporting that a fire at a Venezuelan refinery was closing off about 300,000 barrels of daily production. August crude rose to a record close, finishing up $1.75 to $76.70 a barrel in Nymex trading.

"The various geopolitical tensions have led to safe-haven moves to Treasuries and oil, weakening equity markets," said John Canavan, a market analyst with Stone & McCarthy Research Associates.

About 1.78 billion shares changed hands on the New York Stock Exchange, with decliners outpacing advancers by a 3-to-1 margin. Volume on the Nasdaq was 2.06 billion shares, with decliners beating advancers 4 to 1.

The 10-year Treasury bond rose 7/32 in price to yield 5.07%, and the dollar fell against the yen and euro.

On the Dow, Merck ( MRK) retraced early losses after a New Jersey jury found that the company's Vioxx was not responsible in the heart attack of a 68-year old woman. Merck finished with a gain of 24 cents, or 0.7%, at $36.94.

Meanwhile, Ford ( F) dropped nearly 4.7% after the automaker announced it cut its third-quarter dividend in half. Ford fell 32 cents to $6.56.

A downgrade of Wal-Mart ( WMT) at Merrill Lynch also weighed on on the indices. The firm cut its rating on the world's largest retailer to hold because of deteriorating same-store sales. Wal-Mart swooned 99 cents, or 2.2%, to close at $44.16.

"Despite the obvious geopolitical issues, there were heightened concerns over the health of the consumer," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "Warnings from consumer discretionary companies hit the market hard. We need positive earnings to hold and spur a summer rally."

Precious metals were mixed. Gold added $3.20 to close at $654.40 an ounce, silver was down 7 cents at $11.48 an ounce, and copper rose a penny to $3.67 a pound.

On the economic front, the Labor Department said that initial jobless claims rose by 19,000 to 332,000 last week, above economists' forecasts.

The second-quarter earnings season picked up steam Thursday morning. PepsiCo's ( PEP) profit rose 14% from a year ago to $1.36 billion, or 80 cents a share, beating estimates by 3 cents, and Marriott's ( MAR) net jumped 35% to $186 million, or 43 cents a share, beating estimates by 2 cents.

PepsiCo was higher by 97 cents, or 1.6%, to $62.07. Meanwhile, Marriott was lower by $1.22, or 3.3%, to $36.15.

Shares of SAP ( SAP) fell sharply after the company said second-quarter software sales will rise 8% from a year ago, disappointing bulls. The stock dropped $3.51, or 7%, to $46.83.

Tribune ( TRB) said quarterly earnings fell to $85.7 million, or 28 cents a share, from $231.3 million, or 73 cents a share, last year. Adjusted earnings of 53 cents a share were 2 cents shy of estimates. Tribune was off 85 cents, or 2.6%, to close at $31.50.

Renault-Nissan CEO Carlos Ghosn told a French newspaper that an alliance with General Motors ( GM) could be an "enormous opportunity," depending on the circumstances. Ghosn is scheduled to meet with GM CEO Rick Wagoner in Detroit on Friday. GM lost $1.30, or 4.4%, to $28.32.

An initial public offering by Cowen & Co. ( COWN) priced below the expected range late Wednesday. The Societe Generale unit priced 11.2 million shares at $16 apiece; it had hoped for $19 to $21 a share.

CIBC World Markets downgraded Dow component Walt Disney ( DIS) to sector underperformer from sector performer, citing valuations concerns and a slowdown in earnings growth for 2007. Shares of Disney gave back $1.21, or 4.1%, to $28.70.

Earnings reports will continue to flow in Friday. Results are expected from General Electric ( GE) and EMC ( EMC), among others.

Overseas markets were broadly lower. In Europe, London's FTSE 100 was down 1.6% to 5766, and Germany's Xetra DAX fell 2% to 5525. In Asia, Japan's Nikkei fell 1% to 15,098, and Hong Kong's Hang Seng lost 1.3% to 16,305.