Stocks pull back amid tensions in the Middle East

Stocks retreated Monday as violence in the Middle East and a resulting jump in oil prices reminded investors that the market could face problems beyond the recession.

Investors remained cautious at the start of another holiday-shortened week, unwilling to make many big bets in the final three days of trading for 2008. Volume was very light.

The collapse of a Dow Chemical joint venture intensified Wall Street’s economic worries.

Israel’s escalating assault on Gaza in response to rocket attacks into southern Israel pushed oil prices back above $40 a barrel. Crude futures rose $2.31 to $40.02 a barrel on the New York Mercantile Exchange.

Oil is down more than $100 from its peak of almost $150 a barrel in July, but the fighting in Gaza raised fears that supplies of the commodity from elsewhere in the Mideast could be disrupted, sending prices climbing again.

“What’s going on in Israel didn’t read well over the weekend,” said Todd Leone, managing director of equity trading at Cowen & Co. “Beyond that, it is an incredibly quiet session. It’s really not taking much to move the markets.”

The market also digested a potential blow to deal making on Wall Street. On Sunday, Kuwait’s government canceled its $17.4-billion K-Dow Petrochemicals joint venture with Dow Chemical, saying it was too risky because of the global financial crisis and low oil prices.

Investors tried to gauge whether the development would affect Dow Chemical’s agreement to acquire Rohm & Haas for $15.3 billion. Rohm & Haas said the takeover would go through as planned, but investors punished the shares of both companies. Rohm & Haas sank 15%, while Dow Chemical tumbled 19%.

The Dow Jones industrial average fell 31.62 points, or 0.4%, to 8,483.93.

Broader indexes also declined. The Standard & Poor’s 500 index fell 3.38 points, or 0.4%, to 869.42, and the Nasdaq composite index slumped 19.92 points, or 1.3%, to 1,510.32.

The Russell 2,000 index of smaller companies lost 2.2%.

Declining issues were ahead of advancers by about 7 to 4 on the New York Stock Exchange.

Yields on long-term Treasury bonds dropped along with stocks. The benchmark 10-year Treasury note fell to 2.09% from 2.13% late Friday.

The government reported that six-month T-bills fetched the lowest annualized yield on record -- 0.25% -- at a weekly auction.

The dollar was lower against other major currencies, while gold prices rose.

Wall Street has largely written off the final three trading days of 2008, the worst year for the stock market since Herbert Hoover was president. The Dow has fallen 36%, the biggest drop since 1931 when the Great Depression sent the blue-chip index reeling 41%. And the Standard & Poor’s 500 index is set to record the biggest drop since its creation in 1957. The index of America’s biggest companies is down 41% for the year.

In other market highlights:

Ford Motor shares fell 7 cents, or 3.1%, to $2.22 after billionaire investor Kirk Kerkorian’s investment firm confirmed it sold its remaining shares in Ford six months after boosting its stake in the automaker to 6.49%.

Overseas, key stock indexes rose 0.1% in Japan, 2.4% in Britain, 1.6% in Germany and 0.5% in France.