New York Stock Exchange. - AP

Wall Street pulled back Monday as investors digested Microsoft Corp's decision to withdraw its bid for Yahoo Inc, and oil prices rose to a new record over US$120 a barrel.

The Dow Jones industrial average at times lost more than 100 points.

Microsoft had offered US$43.7 billion to buy Yahoo Inc., but scrapped the bid late Saturday after the software maker and the Internet provider could not agree on a sale price.

The failed deal came as a disappointment to Wall Street, as merger-and-acquisition activity tends to boost shareholder value, and also signals to the broader market that corporate America is optimistic about the future.

Oil price continues to surge

A jump in oil prices raised concerns that inflation could force consumers, who account for more than two-thirds of the economy, to cut their spending on discretionary items.

Crude oil futures for June delivery surged to a new trading high of US$120.21 a barrel on the New York Mercantile Exchange before pulling back.

The jump followed news of an attack on a Nigerian oil facility.

"Energy is a very important piece," said Russell Croft, portfolio manager at Croft Leominster Investment Management in Baltimore, referring to the mood of both investors and consumers.

"It's the price at the pump, it's what people read about."

Despite their concerns about inflation, investors briefly took some encouragement from a key reading on the US service sector.

The Institute for Supply Management said its April index of non-manufacturing activity rose to 52 from 49.6 in March.

A reading above 50 signals economic expansion; analysts had expected the figure would come in at 49.3, according to economists surveyed by Thomson Financial/IFR.

In late afternoon trading, the Dow fell 81.58, or 0.62 per cent, to 12,976.62.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 5.81, or 0.41 per cent, to 1,408.09, and the Nasdaq composite index fell 13.00, or 0.52 per cent, to 2,463.99.

Bonds rise stocks fall

Bond prices rose as stocks dropped. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.83 per cent from 3.86 per cent late Friday.

Gold prices also climbed, while the dollar traded mixed against other major currencies.

In general, first-quarter earnings reports and economic data have been coming in weak, but were not as poor as many on Wall Street had braced for.

Investors have lingering concerns, however - not only is the housing market still weak, but commodities besides oil remain near record levels, threatening consumers' discretionary spending and their ability to pay off debt.

"Our idea is that we're in a long, soft patch," said John Merrill, chief investment officer at Tanglewood Capital Management in Houston.

"The economic problems we have with homebuilding and the over-leveraged consumer and the over-leveraged banking system - they are problems that are going to be with us for a while."

Disappointed

Helping to offset some of investors' disappointment over the abandoned Yahoo deal was a report from The Wall Street Journal, which said Deutsche Telekom AG is considering a bid to buy Sprint Nextel Corp, according to people familiar with the discussions.

Sprint rose 87 cents, or 11 per cent, to US$8.76 on the report and as the newspaper reported that Spring is considering spinning off its Nextel arm.

Meanwhile, Yahoo fell US$4.28, or 15 per cent, to US$24.39 after Microsoft's decision to walk away. Shares of Microsoft slipped 11 cents to US$29.13.