The Nasdaq composite index closed down 159.18, or 6 percent, at 2,407.65, and the Standard & Poor's 500 index lost 34.99, or about 3 percent, to 1,298.35. The Dow Jones industrial average dropped 250.40, or 2 percent, to 10,662.01.
About 12 stocks declined for every seven that advanced on the Nasdaq, which generated a volume of 2.1 billion shares. Volume on the New York Stock Exchange nearly reached a heavy 1.4 billion shares, with 17 stocks falling for every 13 that rose.
Large companies helped the markets lose ground.
Cisco Systems fell $5.25, or about 13 percent, to $36.63; Intel lost $1.73, or 5 percent, to $32.06; JDS Uniphase declined $5.75, or 12 percent, to $42.13; Sun Microsystems fell $3, or about 10 percent, to $28; and Applied Micro Circuits dropped $9.88, or 13 percent, to $63.50.
Applied Micro fell after Banc of America Securities cut the telecom chipmaker's 12-month price to $120 from $160 a share, but the investment firm maintained a "strong buy" rating on the stock.
Despite a dramatic midweek surge--sparked by an interest-rate cut from the Federal Reserve--the markets ended the holiday-shortened week lower. The Nasdaq and S&P finished down about 3 percent and 2 percent this week, and the Dow fell 1 percent.
Weak performances on Thursday and Friday more than compensated for a spike on Wednesday. That's when the Fed unexpectedly cut rates and the Nasdaq closed the day 14 percent higher than on Tuesday.
The Fed cut the federal funds rate by a half-point to 6 percent and the discount rate by a quarter-point to 5.75 percent. Citing a deteriorating economy, the Fed also said it is prepared to approve a further quarter-point reduction in the discount rate.
Vaguely positive economic data announced Friday failed to boost the markets. The nation's unemployment rate held at 4 percent in December, which was slightly better than analysts' bearish expectations.
For the last three months, payroll growth has averaged just 77,000, a sharp slowdown from average gains of 187,000 jobs during the first nine months of the year and 229,000 for all of 1999.
The Labor Department said Friday that private payrolls rose by a scant 49,000 in December, as the manufacturing and construction industries shed jobs.
The factory workweek, which measures how long workers spend in plants and assembly lines, including overtime, fell by 0.8 hours in December. It was the biggest drop since January 1996, and many economists believe the decline indicates a significant softening in the economy.
"There's some weakness below the surface with these numbers," said Paul Christopher, an economist at A.G. Edwards. "Companies in this tight labor market don't want to let people go, so they work them fewer hours instead."
Christopher expects an additional interest-rate reduction in March. Given the softening reflected in the employment numbers announced Friday, he said he is more confident of a March reduction rather than a reduction after the next Fed meeting in late January.
"They gave us Chinese water torture from June 1999 to May 2000, when they raised rates" numerous times in small increments, Christopher said. He speculated that the Fed would use the same strategy to inch rates up.
All off the 18 sectors tracked by CNET Investor finished down. Computer-data storage companies and server-hardware makers were the day's largest losers, falling about 9 percent each.
The CNET tech index lost 115.24 to 2,069.06. Losers outran winners, with 90 of the 97 stocks in the index falling, 6 rising, and one remaining unchanged.
Earnings preannouncements particularly dented the tech sector.
"Few people are expecting fourth quarter (earnings) to be anything but ugly," said Bill Meehan, chief market analyst at Cantor Fitzgerald.
In fact, many experts believe the trading climate has turned so negative that some investors are waiting for more than just a Fed rate cut or two to return to the markets.
"You can say that things will get better because the Fed cut rates, but you need to see some proof of that," said Richard H. Levy, head of block trading at CIBC World Markets.
Like many investors, Levy said he perceived market downturns last year as buying opportunities. But this year he will resume buying only after the markets have made significant gains over a longer period of time.
Next Level Communications, a maker of digital subscriber line (DSL) and optical equipment for broadband networks, announced it expects lower fourth-quarter revenue and earnings.
Next Level pinned the earnings glitch on reduced business from Qwest Communications and slower-than-expected customer development in Korea. The company's shares fell 62 cents to $10.75 and traded as low as $7.25, a drop of about 33 percent.
Copper Mountain Networks announced that its fourth-quarter revenue will miss expectations. Shares of the DSL provider fell 47 cents, or about 10 percent, to $4.28.
Other DSL stocks were also hammered after equipment suppliers Efficient Networks and Turnstone Systems issued profit warnings.
Internet consulting firms, long battered after a difficult second half of 2000, also brought bad tidings to the new year.
Sapient fell 6 cents to $15 and traded as low as $10.81. The company said fourth-quarter revenue of $139 million is expected to be flat with the third quarter and that it forecasts earnings of 10 cents a share, 2 cents lower than Wall Street's consensus estimate as surveyed by First Call.
Sapient executives attributed the shortfall to continued sluggishness among dot-com customers and slower spending among established enterprise clients.
Consultant MarchFirst announced it will initiate a second round of layoffs. The company closed unchanged at $1.53, closer to its 52-week low of $1 compared to the stock's high of $56.50 over the same period.
Keynote Systems dropped $3.06, or 18 percent, to $13.88. The provider of Web site monitoring services said it expects to generate fiscal first-quarter revenue between $13 million and $13.2 million, compared with previous company estimates of $14 million to $14.5 million.
Despite the shortfall, the company said it expects to make a pro forma profit of 11 cents a share, meeting the First Call consensus estimate.
Keynote also revised fiscal-year expectations for the year that will end Sept. 30. It expects to post a profit of between 44 cents to 46 cents a share. That compares with the 54 cents a share forecast from analysts polled by First Call.
Keynote blamed the shortfall on slower business from Internet service providers, which have traditionally made up 25 percent of Keynote's revenue.
The chip sector closed down. The Philadelphia semiconductor index dropped 36.31, or about 6 percent, to 617.49, led by chipmaker Texas Instruments, which lost $4.75, or 9 percent, to $47.31.