Foreign turmoil finally hits Wall St.

Financial markets may have been slow to recognize the threat from Middle East social unrest, but the message now has registered painfully loud and clear.

Wall Street’s fear level has zoomed, driving stocks down from multiyear highs on worries that soaring oil prices could upend the economic recovery.

The Dow Jones industrial average slumped 178.46 points, or 1.4%, to close Tuesday at 12,212.79, amid a global sell-off in equities.

Some analysts say markets are reeling less from the actual jump in oil costs so far than from the utter lack of clarity about how high prices could go.

“The thing that’s scaring people is the speed with which things are occurring” in the Middle East, said Peter Beutel, head of trading advisory firm Cameron Hanover in New Canaan, Conn.

That also could challenge investors who have been patiently waiting for a drop in share prices so they could jump into the market, which has been moving higher with few pullbacks since August.

Stocks tumbled Tuesday as Libyan leader Moammar Kadafi pledged to die a martyr rather than give in to popular calls to resign.

“The fear is that he’s not going to be leaving without the oil fields ablaze,” said Phil Flynn, a commodities analyst at PFG Best Research in Chicago.

Libya is the world’s 12th-largest oil exporter, so any interruption of supply from the North African country could lead to higher prices if it wasn’t made up by other producers.

Crude oil futures for March delivery closed at $93.57 a barrel in New York, the highest price since October 2008. The more actively traded April futures contract, which will become the new benchmark price beginning Wednesday, ended the session at $95.42.

The worsening situation in Libya had driven March oil futures up $5.22, or 6%, to $91.42 a barrel in electronic trading Monday, when most U.S. markets were closed in observance of Presidents Day.

Early Tuesday the April futures price rose as high as $98.48, then pulled back after Saudi Arabia’s oil minister, Ali Ibrahim Naimi, said the Organization of the Petroleum Exporting Countries would be ready to produce more oil if needed -- but that for now, “There is absolutely no shortage of supply.”

Crude prices rose again later in the session, after Kadafi’s threat.

Prices in London continued to trade above U.S. prices. So-called Brent crude ended Tuesday at $105.78 a barrel, a two-year closing high but down from a session peak of $108.70.

Until this week the stock market had mostly ignored the Middle East turmoil that began with Tunisia’s revolution in January, then spread to Egypt, Yemen and other countries.

Investors had largely been focused on expectations that the U.S. economy would gain momentum this year, boosted by the Federal Reserve’s easy-money policies. Key market indexes hit multiyear highs Friday.

But once Libya erupted markets were forced to consider what might happen if revolution spread to even larger Middle East oil producers, including No. 1 exporter Saudi Arabia.

A continuing surge in crude costs would threaten the global economy by draining spending power from consumers and businesses. Already gasoline prices top $3.50 a gallon in California.

Investors’ complacency about the market outlook quickly dissipated Tuesday. One closely watched measure of the stock market’s fear level jumped by the largest amount since May, when markets were sinking amid the European government-debt crisis.

The VIX, or volatility index, surged 4.37 points, or nearly 27%, to 20.80, its highest closing level since Dec. 1. The index gauges investors’ expectations of market volatility based on their trading of S&P; 500 index “put” and “call” options, which can be used to hedge against market swings.

Stock prices overall finished broadly lower, though analysts said there wasn’t a sense of panic.

The Dow’s drop was its largest percentage decline since Nov. 16, while most broader market indexes fell more steeply. The Standard & Poor’s 500 index lost 27.57 points, or 2%, to 1,315.44, its worst one-day loss since Aug. 11. The technology-dominated Nasdaq composite fell 77.53 points, or 2.7%, to 2,756.42, also the biggest decline since mid-August.

Shares of airlines and other transportation companies were hit hard on worries about fuel costs. UAL, parent of United and Continental, dived $2.48, or 9.2%, to $24.44. FedEx dropped $5.03, or 5.1%, to $93.29.

Some energy stocks rallied. Exxon Mobil rose 94 cents to $85.44, and Chevron added $1.60 to $100.32. But most energy issues were lower with the broad market. Occidental Petroleum slid $5.23 to $102.14.

Trading volume on the New York Stock Exchange was the heaviest since late January. Still, some traders said clients were just trimming their holdings after six months of gains rather than fleeing for the exits.

“We just got way ahead of ourselves” in the run-up since August, said Dave Rovelli, head of trading at brokerage Canaccord Adams in Boston. “This is normal profit-taking.”

Some investors pushed money into the classic havens of U.S. Treasury bonds and precious metals. The five-year T-note yield fell to a three-week low of 2.13% from 2.27% on Friday. Yields fall as bond prices rise.

Gold futures in New York rose $12.30 to $1,400.50 an ounce, nearing the record-high closing price of $1,422.60 reached Jan. 3.

Foreign stock markets were down almost across the board, though declines in Europe slowed from Monday’s pace. The German market, which lost 1.4% on Monday, eased less than 0.1% on Tuesday.

On Wall Street, the question now is whether investors who’ve been on the sidelines during the stock market’s relentless advance in recent months will see this pullback as a chance to get in at lower prices.

“As long as the knee-jerk selling doesn’t get out of control over the next day or two we expect this to be a short-term buying opportunity,” said Chris Johnson, chief executive of Johnson Research Group in Cincinnati.

Others counseled patience. Sam Stovall, market strategist at Standard & Poor’s in New York, said he saw “a very good possibility that we are in the beginning of a pullback or a shallow ‘correction,’ a decline of anywhere from 5% to 10% or a bit more,” off key stock indexes.

Oil market analysts estimate that crude’s current price includes at least a $10 “premium” for political uncertainty. The question is whether that’s enough, given the potential for revolutionary sentiment to spread in the Middle East.

Echoing the Saudi oil minister, analysts say prices aren’t rising because of current supply issues.

“The good news is that there is plenty of spare production capacity,” said PFG’s Flynn. “The bad news is that we don’t know where things are going next in the Middle East.”

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tom.petruno@latimes.com

walter.hamilton@latimes.com