U.S. stocks dropped on Tuesday on worries falling oil prices could set off a reversal in the high-flying energy sector, while Alcoa's leaner-than-expected revenue disappointed.

Energy stocks led the S&P 500's losses, with the S&P Energy Index <.GSPE> down 3 percent. Strategists were already worried the rally in energy stocks may have gone too far ahead of earnings, and a drop in oil prices could spark an extended sell-off.

The leadership has been for the longest time in those sectors that are highly related to global growth and commodity prices. So once the commodity space starts rolling over, then equities are poised to follow, said Robert Van Batenburg, head of equity research at Louis Capital in New York.

Oil prices tumbled for a second day following a Goldman Sachs forecast calling for a fall of almost $20 in the price of Brent crude oil in coming months. The International Energy Agency also said high prices could curb oil demand.

Unrest in oil-heavy regions of the Middle East and North Africa has fueled a sharp rise in oil prices. The S&P energy index, by far the market's top-performing sector in the first quarter, is up 11.1 percent in 2011 -- well above the S&P 500's gains of 4.5 percent since the start of the year.

Signaling the start of the U.S. first-quarter earnings period, Alcoa Inc late Monday reported revenue that missed forecasts. Its profit, however, topped consensus expectations. Alcoa's stock slid 6 percent to $16.70 and was the Dow's biggest percentage loser of the day.

Materials stocks in general fell in sync with declines in metals prices. Investors are worried that Japan's massive earthquake and a nuclear crisis could weaken recovery prospects in the world's third-largest economy.

The SPDR S&P Metals and Mining ETF fell 2.2 percent.

The Dow Jones industrial average <.DJI> was down 117.53 points, or 0.95 percent, at 12,263.58. The Standard & Poor's 500 Index <.SPX> was down 10.30 points, or 0.78 percent, at 1,314.16. The Nasdaq Composite Index <.IXIC> was down 26.72 points, or 0.96 percent, at 2,744.79.

Japan raised the severity of the Fukushima nuclear power plant accident to the highest level on the International Nuclear and Radiological Event Scale, putting it on par with the Chernobyl 1986 disaster. Dollar-denominated Nikkei future fell 1.3 percent.

Japan is looming large in the background, Van Batenburg said, noting warnings about supply issues by Japanese companies. Coming into earnings season with that kind of outlier, people are going to take a step back.

The S&P Materials Index <.GSPM> fell 1.4 percent while U.S.-traded shares of Rio Tinto fell 2.3 percent to $72.13. Freeport-McMoRan Copper & Gold Inc shed 3.1 percent to $53.70.

The day's slide broke some technical barriers, analysts said.

The S&P 500 fell below support at 1,320, and touched the rising 20-day moving average at about 1,310, according to Larry McMillan, president of McMillan Analysis Corp. in Morristown, New Jersey.

In one sense, bulls could interpret this as a 'buy' point, except for the fact that the bulls seem to be cowering in the corner, rather than looking for a fight, he said.

Composite volume was below average on the NYSE, Amex and Nasdaq, with 7.53 billion shares changing hands, compared with last year's daily average of 8.47 billion.

Declining stocks outnumbered advancing ones on the NYSE by about 11 to 4 and on the Nasdaq by about 10 to 3.


Shares of Community Health Systems Inc rebounded from losses the previous day, when Tenet Healthcare Corp fired charges against its unwanted suitor. Community Health shares shot up 21.6 percent to $31.48 on Tuesday.

A huge jump in shares of Identive Group Inc , up 113.91 percent at $5.69 on heavy volume, came a day after the provider of identification technologies said its unit got a contract from Google to supply near field communication stickers for the search giant's business listing services.

A number of Chinese-domiciled companies were among the Nasdaq's biggest losers. These companies have come under scrutiny of late as several Chinese names have been delisted from U.S. exchanges. China Shengda Packaging Group Inc was down 7.3 percent at $2.55 while China Automotive Systems Inc lost 9.2 percent to $9.70.

(Reporting by Caroline Valetkevitch; Additional reporting by Doris Frankel; Editing by Jan Paschal)