The Dow Jones industrial average fell 12.86 points to close at 12,389.99. The Standard & Poor's 500 index fell 0.47 points to 1,377.18. The Nasdaq composite index rose 22.66 points to 2,503.14.
U.S. stock gains, however, were capped by lingering credit worries, sparked this week by speculation about Lehman Brothers Holdings.
Investors drew encouragement when Lehman's stock price rebounded after the bond manager Dan Fuss, a well-known investor at Loomis Sayles, said he had been buying debt of the Wall Street brokerage and considered its stock "dirt cheap." Merrill Lynch also raised its recommendation on Lehman to buy, helping lift the company's stock 2.2 percent.
Lehman in recent days had dragged down stocks, falling 18 percent since last Thursday on reports that it was looking to raise new capital after losses sustained in the recent credit crisis.
While credit concerns eased, investors grew gloomier at the tone of Bernanke's remarks, which indicated that the Fed was likely to keep rates on hold because its attention has shifted to keeping inflation in check.
Bernanke said the impact of soaring oil prices has been "relatively muted" because the amount of energy used to produce a given amount of output - a gauge known as energy intensity - has fallen markedly since the 1970s.
He also said that policy makers learned a lesson in the 1970s, in particular that they must keep long-term inflation expectations anchored to achieve low and stable inflation.
Earlier in the day European stocks fell to their lowest close in six weeks weighed down by oil company stocks, which tracked the sharp fall in crude. Euro zone and British government debt rose on soft economic data in Europe and on renewed concerns about the global financial system.
Oil fell below $123 a barrel to its lowest in nearly three weeks because of a sharp rise in U.S. gasoline inventories and after India and Malaysia joined the Asian countries that have cut fuel subsidies, adding to growing global demand. The recent advances of the dollar have also depressed oil prices because oil is denominated in U.S. currency.
U.S. crude settled down $2.01 at $122.30 a barrel, the lowest settlement since May 6. London Brent crude settled $2.48 lower at $122.10 a barrel.
Oil has fallen since touching a record high over $135 a barrel in late May. Dollar weakness, which makes dollar-denominated commodities relatively cheap, had been a major factor in oil's rise to record peaks last month.
Gold ended lower as weaker oil prices and a stronger dollar dented bullion's appeal as an alternative investment.
Spot gold dropped as low as $875.85 an ounce and was last traded at $878.30/879.70 an ounce in New York.
European stocks slipped 1.3 percent, with the pan-European FTSE Eurofirst 300 ending at 1,311.79 points.
The index closed off lows after the better-than-expected reading on the U.S. service sector report.
Oil stocks were the heaviest-weighted losers. BP slid 3.9 percent, Royal Dutch Shell lost 2.9 percent and Total fell 3.8 percent.
"The way oil and gas move is literally the way the market moves because they are so heavily weighted," Elin Ottosson, a strategist, at Cazenove said.
Crude's fall bolstered airline stocks, making the sector the top gainer in Germany, France and Britain. Lufthansa gained 2.8 percent, while British Airways and Air France-KLM both jumped 5.6 percent each.
British government bonds rose after data showed the British services sector contracted in May for the first time in more than five years. Euro-zone government debt rallied on renewed concerns about the global financial system and services activity in the euro zone slipped close to contraction.
Losses in the U.S. debt market were limited as investors were unwilling to take on any radical new positions before Friday when the nonfarm payrolls report is scheduled for release. The report is seen as a key indicator of the U.S. economy's health.
This is cache, read story here