NEW YORK - Stocks plunged yesterday, sending the Dow Jones industrials down nearly 400 points, after oil prices shot up by more than $11 a barrel and neared $140 a barrel - and wiped out investors' recent optimism about the economy.

The prospect of higher energy prices that could hobble consumers and worsen a slowing economy had investors frenetically pulling money out of stocks. The news about rising energy prices compounded investors' anxiety over a worrisome reading on unemployment, which for May showed its biggest monthly rise since 1986.

The decline in stocks also helped drive bond prices sharply higher as investors sought a more secure place for their money.

Crude oil has seen a huge rebound this week after falling amid a drop in demand for gasoline. The jump continued yesterday: Light, sweet crude set a high of $139.12 in after-hours trading on the New York Mercantile Exchange after settling at $138.54, a gain of $10.75 in the regular session. The surge followed a Morgan Stanley analyst's prediction that crude would reach $150 a barrel by July 4. A decline in the dollar and fresh tensions in the Middle East added to crude's advance.

The spike in energy prices came as the Labor Department said the nation's unemployment rate jumped to 5.5 percent in May from 5 percent in April. It was the biggest monthly increase since February 1986 and puts unemployment at its highest level since October 2004.

Still, the sudden rise in oil prices appeared to weigh most heavily on Wall Street. The jump in oil also came after an Israeli cabinet minister hoping to replace Prime Minister Ehud Olmert was quoted as saying Israel would attack Iran if it doesn't abandon its nuclear program.

"I think the biggest concern right now is oil and its potential for a stagflationary environment," said Bill Knapp, investment strategist for MainStay Investments, a division of New York Life Investment Management. Stagflation occurs when stalling growth accompanies rising prices.

The Dow Jones industrial average fell 394.64, or 3.13 percent, to 12,209.81. Broader stock indicators also fell sharply. The Standard & Poor's 500 index lost 43.37, or 3.09 percent, to 1,360.68, and the Nasdaq composite index fell 75.38, or 2.96 percent, to 2,474.56.

Yesterday's pullback came a day after the Dow jumped nearly 214 points, its largest daily point gain since April 18 and a reaction to better-than-expected sales from retailers and a dip in weekly jobless claims.

Yesterday's session punctuated an erratic week for the markets. Stocks fell Monday and Tuesday before moving sideways Wednesday and surging Thursday. The back-and-forth moves left the Dow down 3.39 percent for the week, the S&P 500 off 2.83 percent, and the Nasdaq with a loss of 1.91 percent.

The dollar declined against other major currencies - a move that makes each barrel of oil more expensive. Gold prices rose.

Worries about employment and oil may be intertwined.

Ethan Harris, Lehman Brothers' chief U.S. economist, contends that the employment report helped drive oil prices higher. He said traders are worried that the spike in unemployment would leave the Federal Reserve unwilling to raise interest rates. A notion of a Fed with few options combined with comments from the European Central Bank this week on the possibility of raising rates have hurt the dollar.

"The weaker dollar is pushing up oil prices because oil is denominated in dollars and oil sellers want to be compensated for the weaker dollar," Harris said, adding that he thinks the market's moves have been overdone.

Still, Harris said that even allowing for some variations from seasonal fluctuations, the findings were grim.

The Russell 2000 index of smaller companies fell 22.90, or 3 percent, to 740.37.

Wall Street's pullback weighed on Europe. Britain's FTSE 100 ended down 1.48 percent, Germany's DAX index fell 1.99 percent, and France's CAC-40 lost 2.28 percent on the day. Japan's Nikkei stock average closed up 1.03 percent; trading there ended before the release of the U.S. jobs report.