The Nasdaq composite index fell 2.66 percent, or 50.05 points, to close at 1,831.30, after stagnating in positive territory before the Fed's announcement. The Dow Jones industrial average fell 1.44 percent, or 145.93 points, to 10,174.14.
The Fed, which said it is concerned about the sluggish economy, lowered the federal funds rate 25 basis points to 3.5 percent, a seven-year low.
"Everybody wants instant gratification for things to stabilize but there's no reason in the world why it should occur this way," said Donna Van Vlack, head of trading at Brandywine Asset Management. "You still have companies having big problems, and you've got a lot of layoff announcements that have to be worked through. It's going to take time and patience."
Stocks turned negative after the central bank cut its key federal funds interest rate, which is what banks charge each other for overnight lending, from 3.75 percent to 3.5 percent--its lowest level since spring 1994. The Fed, which was widely expected to cut by a quarter percentage point, signaled it was poised to cut further because of persistent weakness in the economy.
In the past, Fed easing was nearly guaranteed to give Wall Street a jolt because investors anticipated lower rates would boost corporate profits. But the latest cuts left investors cold as this year's corporate profits are forecast to show the worst drop in a decade.
In other news, a bearish report from one of Wall Street's best-known bulls shook up investors earlier in the day. Goldman Sachs's chief investment strategist, Abby Joseph Cohen, cut her year-end target for the S&P 500 index to 1,500 from 1,550.
Cohen also cut her predictions for S&P 500 operating earnings per share; she now expects $51 for 2001 and $56 in 2002. However, the analyst's forecast implies a 28 percent rise in the S&P index for the remainder of the year.
In company news, Amazon.com fell 51 cents, or 4.9 percent, to $9.89. Earlier in the trading session, investors helped tilt the stock up following Prudential Securities' upgrade. The brokerage firm boosted its rating from "sell" to "hold."
Extreme Networks was up 32 cents, or 1.94 percent, to $16.82 after Needham & Co. upgraded it to "strong buy." Shares fell Monday following a downgrade from Morgan Stanley.
McData was up 31 cents, or 2.3 percent, to $13.76 after CE Unterberg Towbin upgraded it to "strong buy."
Computer Associates International was down $1.28 to $32.44 after Dallas financier Sam Wyly on Monday got support from a proxy-advisory firm. Wyly, a shareholder in the company, has won the approval of Institutional Shareholder Services, or ISS, after adjusting his original plans to take total control of the company. Wyly now plans to win minority representation on CA's board.
Among other heavily traded techs, Intel slipped $1.13 to $27.07, Microsoft fell $1.92 to $60.78, Oracle fell 68 cents to $14.13, Cisco Systems slipped 89 cents to $16.01 and Sun Microsystems fell 43 cents to $13.90.
AOL Time Warner fell 31 cents to $39.90, and Yahoo lost $1.45 cents to $13.01.
Staff and Reuters contributed to this report.