Some unfavorable analyst comments on Xilinx and Altera took the steam out of the Nasdaq composite index, which fell 115.03, or 3 percent, to 3,240.53, as the Standard & Poor's 500 index dropped 16.09 to 1,385.94.
The Dow Jones industrial average lost 44.03 to close at 10,524.40, led by General Motors, which fell $2.56 to $59.69.
Lehman Brothers and Salomon Smith Barney led the charge against Altera and Xilinx. Dan Niles at Lehman cut both chipmakers to "neutral" from "outperform," while Clark Westmont at Salomon lowered the companies to "outperform" from "buy."
The analysts warned that sales of programmable logic chips are likely to slow as components become more available, and customers respond with less aggressive orders.
The reports further warned that both companies' "relatively high" exposure of 20 percent to 25 percent in Europe could have adverse effects. Europe has been plagued by a general market weakness and a devalued euro.
Altera shares fell $11.06, or 27 percent, to $29.81 on a volume of 74.1 million shares, more than 11 times the stock's average daily volume, making it the most actively traded stock on the Nasdaq.
Xilinx was the second-most active stock on the Nasdaq, falling $16.69, or 21 percent, to $62.44. Volume topped 67 million shares, more than 11 times the stock's average daily volume.
Investors "are looking at decelerating (earnings) growth going forward," said Richard Cripps, a market strategist at Legg Mason who believes that a rough pre-announcement season indicated to investors that the days of fat earnings growth were coming to an end.
"Because of the carnage that's taken place in front of earnings season, investors are wary," said Bill Allyn, head of trading at Jeffries.
Cripps added that once the uncertainty over earnings season and interest rates eases, investors might see the reasons to jump into a market that many regard as oversold.
Allyn, however, thinks that companies will have to post big numbers for investors to forgive the sins of warning season. "I think investors want to see some major companies beat Street estimates before any confidence is instilled."
The Philadelphia semiconductor index on Tuesday dropped 79.45, or about 11 percent, to 706.51, matching levels it last reached in January this year.
KLA-Tencor lost $1.81 to $34.25 and set a new 52-week low of $32 compared to the chip equipment maker's high of $97.75 over the same period.
Applied Materials shaved off $6.69, or 12 percent, to $49.06; National Semiconductor fell $2.56 to $34.56, and Novellus fell $6.06, or nearly 13 percent, to $41.13.
All of the 18 sectors tracked by CNET Investor headed lower. Semiconductor equipment makers led the way down, falling about 8 percent, followed by semiconductor companies, which fell about 6 percent. Internet content companies were the day's smallest losers, falling 0.25 percent.
The CNET tech index lost 81.46 to close at 2,638.24. Losers mopped the trading floor with winners, as 77 of the 97 stocks in the index fell, 19 rose and one remained unchanged.
Chip stocks in the tech index also took some punches. PMC-Sierra dropped $19.06, or 10 percent, to $171; Analog Devices lost $8.63, or 11 percent, to $69.38; Broadcom fell $20.03 to $211; Cypress Semiconductor stumbled $3.50, or about 10 percent, to $32; and Vitesse Semiconductor gave back $13.63, or nearly 15 percent, to $78.63.
Intel fell $1.50 cents to $37.56, and Advanced Micro Devices inched down 13 cents to $22.25.
Some telecom companies managed to escape the stoning of the semiconductor sector. WorldCom rose 63 cents to $26.56, while Qualcomm gained 31 cents to $79.69.
Dow Jones reported that China Unicom is considering Qualcomm's code-division multiple access telecommunications standard for a wireless network.
Shares of Accelerated Networks rose $2.69, or 25 percent, to $13.25. Credit Suisse First Boston analysts said in a report that the telephone-equipment maker may report a smaller-than-expected third-quarter loss.