The Nasdaq composite index fell 90.94, or 2 percent, to 4,183.73. The Standard & Poor's 500 index dropped 16.33 to 1,494.16. The Dow Jones industrial average fell 88.39 to 10,715.88.
The Labor Department reported that the consumer price index (CPI) rose 0.6 percent in June, the largest increase since March. Most analysts expected that figure to grow 0.5 percent. The jump comes after consumer prices edged up 0.1 percent in May.
Excluding food and energy, the CPI rose 0.2 percent, in line with analysts' expectations.
"Gasoline price increases were a bit bigger than expected," said John Ryding, chief economist at Bear Sterns. The price of gasoline rose 8.8 percent in June, and overall energy prices rose 5.6 percent, the biggest jump since April 1999.
Energy prices had fallen in April and May, before June's surge. Gas prices are down 4.5 percent so far for the month of July, Ryding said.
Analysts said the CPI's rise may not prompt the Fed to raise interest rates when it meets next in August.
"The core CPI was under control, but it was really an energy story," said Mickey Levy, chief economist at Banc of America Securities. "The CPI and producer price index in June show relatively low stable inflation."
Some investors used the opportunity to exit the markets in anticipation of second-quarter earnings, which many companies are announcing over the next two weeks.
"It wasn't a week ago when we were celebrating a (Nasdaq) close above 4,000," Ryding said. "Maybe it's not too surprising to see some people take some chips off the table and see what earnings for Microsoft and Intel do."
CNET tech index fell 51.27 to 3,004.03. Losers outnumbered winners, with 80 of the 97 stocks in the index falling, 17 rising and one remaining unchanged.
All of the 18 sectors tracked were in the red. Semiconductor equipment companies posted the sharpest drops, falling almost 5 percent. Computer services lost the least ground, falling 0.22 percent.
Shares of Copper Mountain, a maker of equipment for digital subscriber lines, skidded. The company announced earnings after market close yesterday.
Shares fell $24.88, or 20 percent, to $98.81, making it the largest percentage loser on the Nasdaq today. Volume topped 8.5 million shares, about five times the stock's daily average volume of 1.7 million.
Digital Island also dropped after it reported earnings and announced an acquisition yesterday. Shares of the Internet software developer fell $5.63, or nearly 13 percent, to $39. Volume exceeded 7.4 million shares, more than twice the stock's average.
Investor wrath also focused on shares of Unisys after the company reported earnings. The shares fell $3, or 21 percent, to $11.13, on a volume of 12.3 million shares, more than four times the stock's average volume of about 4 million shares.
On the bright side, shares of Adaptec rose after some positive comments by a fund manager on CNBC. Adaptec jumped $3.63, or about 18 percent, to $23.94.
The Philadelphia semiconductor index fell 51.89, or 4 percent, to 1,214.50, led by chip equipment maker KLA-Tencor, which fell $4.31, or about 7 percent, to $59.38.