By Chris Dieterich 

U.S. stocks fell to session lows on Thursday after lackluster U.S. economic reports combined with concerns about rising oil prices.

The Dow Jones Industrial Average dropped 109 points, or 0.7%, to 16733, near the session low in mid-afternoon trading.

The S&P 500 index fell 15 points, or 0.8%, to 1929 and the Nasdaq Composite Index lost 34 points, or 0.5%, to 4297.

Energy was the lone sector in the S&P 500 to notch gains as increased violence in Iraq sparked a surge in oil prices. Crude-oil futures rallied 1.5% to $106.00 a barrel, a level not seen since last year.

Shares of fuel-price-sensitive airline stocks fell sharply, with the NYSE Arca Airline Index slumping 3.4%. Delta Air Lines was the worst performer on the S&P 500, down 5.9%, while Southwest Airlines fell 5.2%.

Stocks moved steadily lower as a string of news reports showed that Iraq is moving closer to an all-out sectarian conflict.

"The headlines make people a little bit nervous, but we're not seeing anything that would resemble a panic," said Ian Winer, director of equity trading at Wedbush Securities.

Stocks started their decline on Wednesday following four-straight record highs for the Dow. The benchmark's 102-point drop was its biggest one-day skid in over three weeks. Traders blamed a confluence of political and economic concerns. The World Bank cut its 2014 global growth target and key House Republican suffered a surprise defeat.

On Thursday, economic reports did little to rekindle investor enthusiasm. Retail sales for May increased 0.3% from the previous month, short of expectations for a 0.7% rise. Excluding autos, sales grew 0.1%, versus forecasts of 0.4% growth. Separately, initial claims for jobless benefits edged up 4,000 to 317,000 in the latest week, topping estimates of 310,000.

"It's been a slow recovery with fits and starts," said Lawrence Creatura, a small-cap fund portfolio manager at Federated Investors, which oversees $366 billion. Still, Mr. Creatura has been buying shares of retail and energy companies on the view that the outlook for growth is steadily improving.

Paul Nolte, portfolio manager at Chicago's Kingsview Asset Management, wasn't making any portfolio changes this week based on political and economic developments. He said the U.S. economy is on the upswing and that the Federal Reserve remains committed to its low interest rate policy even as it dials back monthly stimulus efforts.

"It has been a little harder to put money to work because valuations are stretched," he said. A pullback from all-time highs would present "an opportunity to add to some of our holdings," he said, specifically in energy shares.

The yield on the 10-year Treasury note slipped to 2.582%, after settling at a one-month high of 2.642% late Wednesday. Gold futures gained 1% to $1,273.60 a troy ounce. The dollar slipped against the yen and the euro.

The Stoxx Europe 600 gained less than 0.1%. Industrial production in the euro zone increased more than expected in April.

Asian markets were mostly lower. Japan's Nikkei Stock Average fell 0.6% and China's Shanghai Composite lost 0.2%.

In corporate news, Lululemon Athletica slid 16% after the yoga gear maker provided a fiscal-second-quarter earnings and revenue outlook that was below current analyst projections and lowered its full-year outlook. The company also said its chief financial officer, John Currie, plans to retire at the end of the fiscal year. Lululemon unveiled a $450 million stock buyback program.

Dow component Intel slipped 0.3% after the European Union upheld its fine of about $1.43 billion against the semiconductor firm for abusing its dominant position in the microprocessor market.

Restoration Hardware rallied 13% after the home-furnishings retailer reported late Wednesday fiscal-first-quarter adjusted earnings and revenue that rose above analyst estimates and raised its full-year outlook.

Write to Chris Dieterich at christopher.dieterich@wsj.com

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