The Nasdaq composite index fell 78.63, or 2 percent, to 3,835.23, and the Standard & Poor's 500 index dropped 15.06 to 1,465.81.
The Dow Jones industrial average fell 160.47 to close at 10,927 led by Caterpillar, which slipped $2.06 to $37.19. Hewlett-Packard closed down $5.25 at $103.
One stock climbed for every two that fell on the Nasdaq, which closed down nearly 4 percent from last week's close. The Dow lost about 3 percent from last week, and the S&P fell 2 percent.
Shares of database software giant Oracle fell $6.63 to $78.31 after the company released earnings yesterday. Earnings met analysts' expectations overall, but experts speculated that profit-taking caused the stock to slump.
Oracle reported net profits of $501 million, or 17 cents a share, for its fiscal first quarter, compared with $237 million, or 8 cents a share, during the same period last year. Analysts had been expecting earnings of 13 cents a share, according to market researcher First Call/Thomson Financial.
Large cap stocks also took a slight beating on the Nasdaq. At the end of regular trading, Intel closed down $2.11 at $57.52 on a volume of 76 million shares, making it the most actively traded stock on the Nasdaq. Microsoft dropped $1.63 to $64.19, and Sun Microsystems slid $4.44 to $113.06.
Volume spiked because of an event that happens every quarter known as triple-witching: the simultaneous expiration of futures, options on individual stocks and options on stock indexes.
About 1.78 billion shares exchanged hands in Nasdaq trading, higher than the usual volume of the past few weeks. Volume on the New York Stock Exchange was heavy at about 1.23 billion shares.
"The market tried to rally yesterday, but it failed," said Brian Belski, a market strategist at U.S. Bancorp Piper Jaffray. The Nasdaq rose 90 points yesterday, but closed up just 19.97 at 3,913.86 despite a favorable producer price index, a measure of wholesale prices, that indicated a low risk of accelerating inflation.
"When you have good PPI numbers, and the market falls, people get scared," Belski said, adding that yesterday helped set the stage for today's market downturn.
Today's positive consumer inflation numbers--typically a boon for investors--did not help boost the markets.
The Consumer Price Index (CPI) declined a seasonally adjusted 0.1 percent in August, its first drop in 14 years, after increasing 0.2 percent in July. A drop of 2.9 percent in overall energy prices, including a 6 percent slide in gasoline costs, helped push consumer prices lower.
Excluding the volatile energy and food categories, the "core" rate of inflation at the consumer level rose for the fifth month in a row by 0.2 percent, matching analysts' expectations.
The data added more proof that the economy is slowing down, raising investor hopes that the Federal Reserve will not bump up interest rates.
"We believe that core inflation has peaked. With the economy slowing, core inflation should move lower in the coming months," Merrill Lynch economist Gerald Cohen wrote in a report.
Cohen also said that he believes energy costs "should reverse in September."
The CNET tech index lost 49.91 to close at 3,057.47. Losers edged out winners, with 78 of the 97 stocks in the index falling and 19 rising.
Nearly all of the 18 sectors tracked by CNET Investor fell today. Server software companies posted the sharpest drops, falling about 5 percent. Network equipment makers were one of the day's only gainers, climbing a slim 0.36 percent.
Xerox fought the negative mood and rose $1.88, or nearly 12 percent, to $17.88 amid speculation that it might be a takeover target.
PSINet, a provider of Internet access to businesses, fell $2.69, or about 19 percent, to $11.75, while Anadigics dropped $5.22, or 17 percent, to $24.66.
Analyst downgrades and earnings news plowed down shares of software maker Red Hat, which fell $4.06, or 16 percent, to $21.19.
Red Hat yesterday reported an adjusted loss of 1 cent per share, beating analyst estimates by a penny and stepping closer to profitability. The company lost an adjusted 6 cents per share in the same period last year. The leading Linux seller reported an adjusted net loss of $1.9 million on revenues of $18.5 million for its fiscal second quarter ended Aug. 31.
Internet software maker Adobe rose $7.25 to $132.63 after the developer of publishing and graphic-design software said sales will increase at least 25 percent in the fourth quarter and fiscal 2001.
The Philadelphia semiconductor index fell 30.28, or 3 percent, to 974.59, led by Lattice Semiconductor, which lost $4.19 to close at $61.31. The index fell 6 percent from last week's close at 1,039.96.