The Nasdaq composite index closed down 109.01, or 4 percent, to 2,597.92, and the Standard & Poor's 500 index fell 26.98, or 2 percent, to 1,314.95. The Dow Jones industrial average lost 214.62, or 2 percent, to 10,414.49.
At one point Thursday, the Nasdaq lost more than 180 points, extending its loss to 50 percent since it peaked at 5,048.62 in March.
The sell off in tech shares was partially sparked by Gateway, which warned Wednesday that revenue and earnings would fall short of expectations due to slow sales so far this holiday season. The news sent Dell Computer, Apple Computer, Compaq Computer and Hewlett-Packard tumbling.
Gateway shares closed at $19, or 36 percent lower than their closing price on Wednesday. The stock hit a 52-week low Thursday morning, touching $17.49. Salomon Smith Barney, Prudential Securities, Merrill Lynch and Banc of America Securities each issued downgrades on the company.
Semiconductor companies also slid after programmable-chip maker Altera said its fourth-quarter revenue would not increase from the third quarter, despite an earlier projection of 12 percent growth. Intel and Xilinx fell on the news.
The CNET tech index fell 86.72 to 2,201.28. Losers decimated winners, with 73 of the 97 stocks in the index falling, 23 rising and one remaining unchanged.
Nearly all of the 18 sectors tracked by CNET Investor headed south. PC hardware companies fell 8 percent, followed by semiconductor makers, which fell about 8 percent. Server software makers were the day's best performers, climbing 7 percent.
Although it was a disappointing day on Wall Street, some experts predicted times would get tougher before they improved.
The markets "probably have a little more suffering to go through," said Ned Collins, head trader at Daiwa Securities America. "There are so many question marks out there...If the stock market is a six-month leading indicator of what the economy will look like, it's telling us (the economy) is going to look lousy."
Collins pointed out that the historical annual return for equities for the past 100 years is about 7 percent. But over the past three years, returns have jumped to more than 20 percent. "There's got to be a payback sometime," he said.
Collins also suggested that the markets have behaved irrationally, with the Nasdaq having "no business" rising to more than 5,000 or falling to 2,500. "The pendulum always swings too far," he said.
Despite the carnage on the trading floor, one of the biggest bulls on Wall Street reaffirmed her bullish stance. Goldman Sachs analyst Abby Joseph Cohen maintained her 12-month price target of 1,650 for the S&P 500, about 27 percent above its current level.
"Indications that cash is building in portfolios, and that valuations are the most appealing they have been all year, support the forecast of rising stock prices," she wrote in a note released Thursday.
But for now, investors seem content to remain on the sidelines. The Investment Company Institute, a fund industry trade group, reported that 6 percent of mutual fund assets were in cash at the end of October, compared with September's 5.3 percent and 5 percent in October 1999.
The organization also said that $26 billion flowed into money market mutual funds for the month of October, compared with an outflow of $8.6 billion in September.
As with all market downturns, Wall Street continues to wonder when the gloomy market conditions will clear so buying can commence once again. But predicting a bottom is tricky.
"A bottom is best identified retroactively," said Peter Rogers, director of research at San Francisco-based technology investment company WR Hambrecht. "It's difficult for most people to spot a bottom, even (when) in the middle of it."
Brian Belski, a fundamental market strategist at U.S. Bancorp Piper Jaffray, said it's virtually impossible to say when sidelined investors should return.
"Past attempts (at determining the bottom) have failed miserably," he said. "All the conventional wisdom that goes into predicting a bottom...hasn't held true either."
Belski says analyzing traditional measurements, including put-call ratios and advance-decline statistics, has not helped. He prefers to watch margin calls as an indicator, or the amount of times during a given period when brokers call in loans made to clients to buy stock.
Among tech shares, Dell slid $2.56, or almost 11 percent, to $19.25, after receiving downgrades from Lehman Brothers and Salomon Smith Barney.
Compaq, which was downgraded by Lehman Brothers, dropped $1.20 to $21.50. HP fell $2.94, or about 9 percent, to $31.63.
The Philadelphia semiconductor index dropped 39.39, or about 7 percent, to 536.99.
Altera fell $2, or about 8 percent, to $23.94, while Xilinx, the largest maker of programmable logic chips, fell $4, or 9 percent, to $39. The company was downgraded by Chase Hambrecht & Quist, Credit Suisse First Boston, Merrill Lynch, Robertson Stephens and Bear Stearns.
Intel, which was cut to "outperform" by Lehman Brothers, slid $4.69, or almost 11 percent, to $38.06. Advanced Micro Devices also slid $1.81, or about 11 percent, to $15.25
Some software stocks managed to buck the downturn. Oracle rose $3.63, or nearly 16 percent, to $26.50; Veritas Software advanced $9.56, or nearly 11 percent, to $97.56.