By Amy Baldwin
The Associated Press

NEW YORK - A long-dormant fear surfaced on Wall Street this past week as rising oil prices reminded investors that inflation might pose another threat to the uncertain economic recovery.

Increasing tensions with Iraq and an oil strike in Venezuela sent already advancing crude prices even higher, and in turn thwarted the stock market's usual Santa Claus rally. The price of oil for delivery in February closed at $32.72 a barrel Friday, and some analysts predict that it could soon hit $35.

Analysts fear that stocks will revisit five- and six-year lows made in July and October.

"I see that happening in January. I hate to break the bad news," said Gary Kaltof of Investors' Edge Partners in Orlando, Fla.

Inflation hasn't been a concern for months, but a higher price for crude can ripple into the rest of the economy, driving prices for all kinds of goods and services higher. What has Wall Street worried is the fact that an uptick in inflation could prompt the Federal Reserve to raise interest rates more aggressively.

Analysts have predicted that the Fed will begin raising rates next year as the economy shows more signs of strengthening. Ordinarily, such action would be viewed as a sign that the Fed has confidence in the economy. But it becomes worrisome if inflation is also a factor - the Fed is likely to be more vigilant if it feels the need to keep prices in line.

Stocks fell this past week, stifling the so-called Santa Claus rally the market usually enjoys when investors really look forward to the new year.

"Nervousness has been the driving factor of market activity. A little nervousness can be a depressing element on stocks," said Kevin Caron, market strategist, Ryan, Beck & Co.

Mr. Kaltbaum said the selling could become more pronounced because stocks are falling below their levels of October, when the market began its autumn rally.

"The market is speaking loud and clear and stocks like IBM and Citigroup are breaking important support levels," he said. "As more and more stocks start to do this, it usually means there is more bludgeoning to come."

But Mr. Caron believes the oil and inflation concerns will be short-lived. Political commentators predict the United States will begin military action against Iraq in late January, he noted. Stocks typically fall in anticipation of a conflict, but rebound afterward.

"Looks like the consumer might be holing up and bearing down for whatever is ahead," said Chris Johnson, manager of quantitative analysis at Schaeffer's Investment Research in Cincinnati.