A spike in supplies has sent U.S. ethanol prices tumbling to four-year lows and curbed profits for an industry that had posted robust earnings for most of this year.

Ethanol futures plunged 28% last month, as falling domestic demand left U.S. producers with the largest inventories in more than a year.

Stockpiles in September reached the highest level since March 2013, according to the U.S. Energy Information Administration. While demand for the biofuel, along with the gasoline into which it is blended, typically declines after the summer driving season, this year's downshift was pronounced.

"Demand for gas went off a cliff in early September, and ethanol blending fell off with it," said Geoff Cooper, senior vice president at the Renewable Fuels Association, a trade group for ethanol makers.

The price drop marks a blow to ethanol makers, but the industry is accustomed to volatility and has faced more severe setbacks. In 2012, many producers had sharp losses and some idled plants as the price of their main raw material, corn, soared to records due to a severe U.S. drought. In 2008, some ethanol companies filed for bankruptcy amid a similar spike in corn prices.

Stock prices for some ethanol makers have slumped recently following big gains earlier in the year. Shares of Green Plains Inc., GPRE -5.81% one of the biggest U.S. producers, dropped 16% in September, while Pacific Ethanol Inc., PEIX -6.31% a smaller producer, slid 40%.

For U.S. consumers, the drop in ethanol prices may provide modest relief at the gas pump, analysts say. Most U.S. gas contains as much as 10% ethanol, the result of federal requirements started in the 2000s that increased the blending of the additive into the fuel supply. Ethanol long has been pitched as benefiting the environment and helping to reduce U.S. reliance on imported oil.

But weaker ethanol prices are bad news in the near term for the depressed U.S. corn market. Ethanol makers are starting to cut production in response to weaker profit margins, so they are using less corn. Corn growers have been hoping that strong demand from ethanol producers, which consume more than a third of annual U.S. corn output, could help lift corn futures that slumped to five-year lows Tuesday.

The drop in ethanol prices comes as the $44 billion ethanol industry is grappling with other challenges. The Environmental Protection Agency is weighing a final decision on its proposal last year to cut its annual requirement for ethanol blending in gasoline, due in part to weak demand for blends containing more than 10% ethanol. The EPA may make a final decision within the next couple of weeks, according to a person familiar with the deliberations. The EPA had proposed a requirement that 13 billion gallons of corn ethanol be blended into the nation's fuel mix in 2014, lower than the 14.4 billion originally intended under a 2007 law.

On Thursday, ethanol futures for October delivery, the front-month contract, fell 0.3% to $1.528 a gallon on the Chicago Board of Trade, the lowest closing price for a front-month contract since June 2010.

Ethanol for November delivery, the most actively traded contract, tumbled 2.9% to $1.483 a gallon, part of a broader slide in fuel prices. U.S. crude-oil futures for delivery in November at the New York Mercantile Exchange settled higher at $91.01 a barrel, after earlier dipping below $90 a barrel for the first time in 17 months, and gasoline futures reached a 3½-year low, as oil producers showed no signs of cutting back output despite a global glut.

Ethanol prices have fallen for much of this year because the price of corn plummeted due to a record crop last year and expectations for an even larger one this year. Cheap corn has helped ethanol makers generate high profit margins.

Industry margins fell to about 22 cents a gallon in late September, down from an all-time high of $2.04 a gallon in April, according to Iowa State University's Center for Agricultural and Rural Development.

Michael Cosgrove, a partner at proprietary-trading firm Vectra Capital in New York, said ethanol prices could rebound if processors dial back production more. "In the short term, [prices] could go a little lower, but I'd be surprised if we could go much lower for much longer," he said.

Producers have cut output in recent weeks. In the week ended Sept. 26, U.S. ethanol production fell to a six-month low of 881,000 barrels a day, the EIA said Wednesday.

With the price of ethanol currently about $1 a gallon less than gasoline, many refiners will blend as much ethanol into the fuel as they can, which could lead to some savings for consumers, analysts said.

"A dramatic change in ethanol prices is only going to lead to a few-cent change in the price of gasoline, but it does help drivers," said Michael Green, spokesman for automobile club AAA. Regular gasoline cost an average of $3.33 a gallon Wednesday, six cents below a year ago, according to AAA.

Ethanol futures also have been pressured by a September announcement by Brazil's government that it would offer tax benefits to the country's sugar and ethanol industries. The new measures raised concerns among traders that Brazil would be able to sell its ethanol more cheaply to overseas buyers, denting demand for U.S. ethanol exports.

Some analysts don't see the Brazil move having a significant impact. U.S. exports have been a bright spot recently for the industry, as low prices have helped stimulate more demand from buyers, including the United Arab Emirates, the Philippines and Mexico. U.S. exports rose 54% to roughly 423 million gallons in the first half of this year from a year earlier, according to the EIA.

U.S. exports could ramp up further in the next three months because Brazil's production of ethanol slows in the fourth quarter as its sugar cane harvest ends, analysts said. Even U.S. exports to Brazil itself could rise later this year because processors of the biofuel there are grappling with curtailed feedstocks because of a drought.

Citigroup +0.29% analyst Aakash Doshi predicts that U.S. exports will average 25 cents-a-gallon cheaper than Brazil's despite the country's planned tax credits.

"Ethanol margins have largely bottomed out for the short term and will likely rebound in the next three to six months due to exports, although higher corn prices later this decade could eventually put a cap on margins," Mr. Doshi said.

Another wild card for ethanol prices is the nation's rail system. Unusually cold and snowy weather last winter contributed to major shipping backlogs in the Midwest, which slowed distribution of ethanol to coastal ports, where refiners mix the biofuel with gasoline for domestic use or export it. A supply squeeze pushed ethanol futures to $3.517 a gallon in April, a more-than seven-year high.

Transportation snags this winter could send prices climbing again, analysts said.

"The money isn't as good as it has been, but I still think it's going to be a good time to be in the business," said Neil Crocker, plant manager for ethanol producer Hankinson Renewable Energy LLC in Hankinson, N.D. He was forced to idle operations for several days last spring because of congestion on rail lines.

—Nicole Friedman, Amy Harder and Leslie Josephs contributed to this article.

Write to Jesse Newman at jesse.newman@wsj.com