Concerns that rising oil prices could hurt economic recovery prompted investors on Tuesday to sell stocks and hedge against further declines.

The CBOE Volatility Index VIX <.VIX>, Wall Street's so-called fear gauge, jumped 14.5 percent to 21.01 on growing uncertainty about oil. The index measures the cost of using options as insurance against a decline in the S&P 500 <.SPX> index.

We've been seeing how quickly the VIX can spike up, and there is no reason to believe that it won't double from where it is now, said Harry Rady, CEO of Rady Asset Management in San Diego, California.

Brent crude rose above $116 a barrel as supply disruptions persist and political violence spreads in the Middle East and North Africa. Higher oil translates into increased energy and gasoline costs for consumers.

U.S. crude and gasoline futures extended gains in extended-hours trading after data showed domestic crude inventories unexpectedly fell. U.S. stock index futures fell slightly, with S&P futures off 3.3 points.

Federal Reserve Chairman Ben Bernanke said the recent surge in oil was unlikely to derail the economy, but his comments did little to reassure investors worried that turmoil in the Middle East could hit Saudi Arabia, the world's largest oil exporter. The Dow Jones Transports index <.DJT> fell 2.5 percent.

Stocks have taken their cue from oil since the start of turmoil in the Middle East and North Africa in January. The S&P had its weakest performance since November last week but still tallied three months of gains.

The Dow Jones industrial average <.DJI> fell 169.38 points, or 1.39 percent, at 12,056.96. The Standard & Poor's 500 Index dropped 21.04 points, or 1.59 percent, to 1,306.18. The Nasdaq Composite Index <.IXIC> lost 44.86 points, or 1.61 percent, to 2,737.41.

About 8.67 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, higher than last year's daily average of 8.47 billion. Volume has recently been solid on days when the market falls, but often comes under 7 billion on up days.

Investors took a cautious stance as cyclical sectors experienced the biggest losses, while defensive sectors such as utilities, healthcare and consumer staples limited losses.

Wal-Mart Stores Inc and Coca-Cola Co helped the Dow to limit losses. Wal-Mart rose 0.2 percent to $52.06, while Coca-Cola was up 1.5 percent to $64.91.

Gasoline and heating oil futures each gained about 3.5 percent to $3. The S&P's materials <.GSPM> index dropped 2.3 percent while the industrials <.GSPI> dropped 2.2 percent. According to AAA, the national average price of regular unleaded gasoline is currently at $3.35 per gallon.

The real story is gasoline, said Nick Kalivas an analyst, at MF Global in Chicago. The market is getting worried that you could see $4 gasoline in the U.S.

Financial stocks came under pressure after JPMorgan Chase & Co said it could face material fines and significant legal costs from a wide-ranging probe into the industry's foreclosure practices.

JP Morgan fell 2.3 percent to $45.60 while the KBW bank index <.BKX> fell 2.3 percent.

Declining stocks outpaced advancing stocks on the NYSE by a ratio of about 3 to 1, while on the Nasdaq, decliners beat advancers by a ratio of 10 to 3.

(Reporting by Angela Moon, Editing by Kenneth Barry)

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