Oil ruling sends energy stocks reeling

NEW YORK - U.S. stocks finished Tuesday's session sharply lower as energy shares sank after a federal judge struck down the Obama administration's moratorium on deepwater drilling projects in the Gulf of Mexico.

Stocks already were under pressure after disappointing housing data, although a report showing strength in regional manufacturing had encouraged some buying.

But the market swooned after U.S. District Judge Martin Feldman ruled in favor of Hornbeck Offshore, the company that challenged the May 28 government moratorium on new deepwater drilling projects put in place by the White House in response to the Gulf oil spill.

The administration vowed to appeal the New Orleans federal judge's decision, fueling expectations that protracted legal battles lay ahead.

The Dow Jones industrial average ended down 148.89 points, or 1.4 percent, at 10,293. Of the blue-chip average's 30 components, 27 ended lower, led by a 3.7 percent drop in shares of Alcoa Inc. Exxon Mobil fell 1.9 percent and Chevron Corp. dropped 2.3 percent.

Home Depot fell 2.6 percent after the release of data showing sales of previously owned homes in the U.S. slipped 2.2 percent in May to a 5.66 million annual rate. The surprise decline followed two monthly increases driven by a tax incentive for first-time buyers.

However, Merck held onto slight gains, as did Johnson & Johnson. J&J agreed to pay $45 million to develop and commercialize a type-1 diabetes treatment-and-prevention drug from Sweden's Diamyd Medical AB.

The S&P 500 fell 1.6 percent to 1,095.31. The benchmark gauge fell below its average price over the last 200 days, a bearish signal to technical analysts.

"It's just a sloppy environment," said Stephen Wood, chief market strategist for Russell Investments in New York. "The housing recovery is very fragile. Then, there's the Gulf situation decreasing earnings visibility. You're going to get a lot of volatility."

The VIX, as the Chicago Board Options Exchange volatility index is known, surged 8.7 percent to 27.05, the biggest gain since June 4. The measure, which tends to rise when investors are paying more for protection from losses in the S&P 500, surpassed 40 in May for the first time in almost 13 months.

Anxiety remained high over the health of European banks, after French bank Credit Agricole said it now forecasts its Emporiki Bank of Greece SA unit will return to profit in 2012 instead of 2011 because of higher-than-expected loan losses.

Earlier, Fitch had downgraded French bank BNP Paribas' credit rating. Last week, European leaders agreed to publish results of stress tests showing the financial health of individual lenders by the end of July, in a bid to improve market confidence.