Stocks fell on Wednesday as oil prices advanced on continued turmoil in Libya and as a bond auction in Portugal failed to ease concerns the country would need a bailout.

Brent crude gained 1.5 percent to $114.78 a barrel while U.S. oil futures gained 0.4 percent to $105.42.

Libyan forces loyal to Muammar Gaddafi surrounded rebels in the western city of Zawiyah with tanks and snipers in the main square, witnesses said.

In Portugal, the government's two-year cost of borrowing hit the highest level since it joined the euro in a bond auction on Wednesday, and an official said yields were unsustainable in the long run without Europe-wide action.

The market has for a while absorbed the negative news, and the negative news is starting to mount, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio.

That is the big question, how much more negative news can the market handle? I wouldn't bet against it here, but nonetheless, if 1,300 (on the S&P 500) eventually gives way on some negative news, we could be due for a well deserved break.

The Dow Jones industrial average <.DJI> dropped 36.10 points, or 0.30 percent, to 12,178.28. The Standard & Poor's 500 Index <.SPX> lost 5.80 points, or 0.44 percent, to 1,316.02. The Nasdaq Composite Index <.IXIC> fell 23.60 points, or 0.84 percent, to 2,742.17.

Wednesday marks the two-year anniversary of the bull market run from a 12-year S&P closing low of 676.53 sparked by the financial crisis.

Finisar Corp plummeted 37.5 percent to $25.02 after the network equipment maker forecast a dismal fourth quarter, blaming an inventory pile-up by telecommunications equipment makers in China. The NYSE Arca Networking index <.NWX> fell 2.6 percent.

In a light session for economic data, investors will watch U.S. wholesale inventories for January at 10 a.m. (1500 GMT), expected to show a rise of 0.8 percent from December.

(Reporting by Chuck Mikolajczak; Editing by Padraic Cassidy)