Dow falls 400 points, oil spike moderates amid Middle East tensions

U.S. stocks fell on Tuesday as investors eye growing tensions in the Middle East and their potential effects on inflation and global trade.

The Dow Jones Industrial Average fell 403.51 points, or 0.83%. The Dow was down 1,278 points, or 2.6%, at the worst levels of Tuesday's trading session.

The Nasdaq Composite and S&P 500 dropped 1.02% and 0.94%, respectively.

Investors feared that the higher oil prices could fuel inflation and complicate central bank policy decisions already strained by tariff-driven price increases.

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International benchmark Brent crude was up more than 4% at $81 a barrel on Tuesday, while West Texas Intermediate crude climbed over 4% to $74 per barrel.

Oil prices eased on Tuesday after President Donald Trump ​said he had ordered the U.S. International Development Finance Corporation to provide political risk insurance and financial ‌guarantees for maritime trade traveling the Gulf, adding that the U.S. Navy could begin escorting oil tankers through the Strait of Hormuz if necessary.

"No matter what, the United States will ensure the FREE FLOW of ENERGY to the WORLD. The United States’ ECONOMIC and MILITARY MIGHT is the GREATEST ON EARTH," Trump wrote in a Truth Social post.

Tehran's threat to attack any vessel attempting to transit the Strait of Hormuz, combined with production halts by several Middle Eastern oil and gas producers, has driven up global shipping rates and prices of crude and natural gas.

The strait, a critical choke point, carries roughly one fifth of the world's total oil consumption.

The 10-year Treasury yield touched its highest level in more than a week and investors pushed back expectations for a 25-basis-point interest rate cut by the Federal Reserve to September from July, according to LSEG-compiled data.

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"Investors worry about additional inflation coming down the road. The main concern is that (oil prices) goes to over $100 a barrel and stays there," said Robert Pavlik, senior portfolio manager at Dakota Wealth.

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Reuters contributed to this report.