NEW YORK — Stocks tumbled Tuesday, sending the Standard & Poor's 500 Index to its first drop in three days, as concern that rising energy costs will hurt the economic recovery overshadowed the fastest manufacturing growth since 2004.
The S&P 500 fell 1.6 percent to 1,306.33. The gauge slid 1.7 percent last week as anti-government uprisings in Libya pushed oil prices higher. The Dow Jones Industrial Average dropped 168.32 points, or 1.4 percent, to 12,058.02. The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, surged 15 percent to 21.01.
"Anyone who thinks that a year from now we're going to look at the Middle East and see nothing but candy and roses, that's not going to happen," said Stanley Nabi, New York-based vice chairman of Silvercrest Asset Management Group. "Manufacturing, the overall U.S. economy, is doing very well. Still, that geopolitical situation will be an overhang."
Stocks erased an earlier advance after crude oil extended gains amid concern that unrest will spread to Iran. Oil climbed to the highest level since September 2008 as authorities in Iran, the second-largest producer in the Organization of Petroleum Exporting Countries, arrested opposition leaders to derail planned demonstrations.
The surge in oil overshadowed data showing that factories added workers and boosted production in February, indicating more momentum for the expansion. The Institute for Supply Management's factory index increased to 61.4, the highest since May 2004. Readings greater than 50 signal growth. Estimates of the 77 economists in the Bloomberg survey ranged from 58.7 to 63.3, with the median at 61.
"We'll continue to see signs of strength in the U.S. economy," said James Dunigan, chief investment officer at PNC Wealth Management in Philadelphia. "Manufacturing is improving, and that helps the jobs picture and makes consumers feel better. Of course, we cannot forget the unrest in the Middle East. That's a risk. The question is whether oil will go even higher, triggering fears of inflation."
The S&P GSCI Total Return Index of 24 commodities gained 3.8 percent in February and rose for a sixth consecutive month, the longest streak since 2004, data compiled by Bloomberg shows.
"These commodity price increases are staggering," said Kevin Rendino, a money manager at New York-based BlackRock. "Each commodity is different, but there is a supply issue for oil. There has been real economic demand for these commodities since the economy began recovering."
Gauges of raw-materials and industrial producers had the two biggest declines in the S&P 500 Tuesday within 10 industries, slumping at least 2.2 percent.
Alcoa, the largest U.S. aluminum producer, fell 3.7 percent, the most in the Dow, to $16.23. GE retreated 3.2 percent to $20.25.