Stocks fell sharply and oil prices spiked to their highest level in two years Tuesday as unrest in Libya worsened.

Oil prices jumped 6 percent to $95 a barrel. The fight between protesters and forces loyal to the Libyan leader Moammar Gadhafi threatens oil production from the world's 15th largest oil exporter, accounting for 2 percent of global daily output. Libya also sits atop the largest oil reserves in Africa.

The Dow Jones Industrial Average sank 178.46 points, or 1.4 percent, to close at 12,212.79. Bond prices rose as investors sought safety.

Libyan leader Moammar Gadhafi vowed to fight to his "last drop of blood" and roared at his supporters to take to the streets against protesters demanding his ouster.

The Standard & Poor's 500 index fell 27.57, or 2 percent, to 1,315.44. It was the worst day for the S&P since Aug. 11.

The Nasdaq fell 77.53, or 2.7 percent, to 2,756.42.

Among traders, the main worry is that unrest will spread to other oil-rich countries in the Middle East and North Africa. Protests toppled longtime dictators in Libya's neighbors Tunisia and Egypt in the past month, and protests are continuing in Yemen and Bahrain.

Jim Ritterbusch, an energy analyst, said a "fear premium" has added about $10 a barrel to oil prices in recent days. Prices could tumble once the region settles down, he said.

Oil producers rose with the prospect of a drop in oil supply. Chevron Corp. gained 1.6 percent, the largest gain among the 30 large companies that make up the Dow Jones industrial average. Exxon Mobil Corp. rose 1 percent.

Higher fuel costs hurt airline stocks. Delta Air Lines Inc., American Airlines parent AMR Corp., United Continental Holdings Inc. and US Airways Group Inc. all dropped by 5 percent or more.

Investors drove into the relative safety of Treasurys, pushing their prices higher and lowering their yields. The yield on the 10-year Treasury fell to 3.46 percent from 3.59 percent late Friday.

Brian Bethune, an economist at IHS Global Insight, said a $10 rise in the price of oil subtracts roughly 0.4 percentage point from economic growth. An increase to $150 or $160 a barrel could knock the economy into a recession, Bethune and other economists say.

Higher oil prices also pinch U.S. consumers by pushing up the price of gas. "This puts a damper on consumer optimism, which is really critical at this stage of the recovery," said Alan Gayle, senior investment strategist for RidgeWorth Investments.

Wal-Mart Stores Inc. fell 3 percent after revenue at stores open at least a year fell for the seventh straight quarter. That raised worries about the company's ability to turn around its U.S. business this year.

Barnes & Noble Inc. fell 14 percent after the bookseller said its net income fell 25 percent. The company also suspended its dividend and said it would not forecast its fourth-quarter or full-year earnings following last week's bankruptcy filing by Borders Group.

Falling stocks outnumbered rising ones nine to one on the New York Stock Exchange. Volume was 1.3 billion shares.