Few companies were spared from the carnage as investors scrambled to unload shares in companies large and small. Chip giant Intel fell 9 percent, for example, and networking firm Emulex tanked 50 percent.
"We have not seen this much death and destruction for quite some time," said Louis Giglio, a senior portfolio manager at American Express Financial who manages about $6 billion. "This sell-off is similar to the sell-off during the Gulf War" of 10 years ago.
The body count: The Dow lost 617.78, or nearly 6 percent, to 10,305.77. The Nasdaq composite index fell 355.51, or about 10 percent, to 3,321.27, its second-largest percentage decline ever. The Standard & Poor's 500 fell 83.20, or about 6 percent, to 1,357.31.
Late in the day, the Dow was down more than 700 points and the Nasdaq was off more than 400 points. But a modest, 11th-hour rally pulled the indexes of those lows.
With today's staggering decline, the Nasdaq has plummeted 34 percent in the past 25 trading days. So far this year, the Nasdaq is down about 18 percent, although the index is up 32 percent from one year ago.
The spark for today's sell-off was a government report showing a greater-than-expected rise in consumer prices. Worries that the Federal Reserve may have to raise interest rates to tame inflation swept through markets that were already under severe pressure from several weeks of steady selling.
The current pessimism is a reversal from just last month, when the Nasdaq reached an all-time high of 5,048.62 and some analysts began talking about the Nasdaq reaching 6,000. Today it seems more likely that the Nasdaq will fall to 3,000 first.
The tech-heavy index has fallen for five consecutive days, a period in which it also recorded its second- and third-largest point losses in its history.
"We're deep into a correction in my opinion," Giglio said. "What's absolutely incredible is that people are selling the good (stocks) with the bad...You're seeing a 50 percent-off sale on some of the best technology companies out there."
Analysts said many factors have contributed to the downturn. A March 20 article in Barron's magazine predicted that many Internet companies would run out of cash rather that post profits that many investors expected.
Highly respected Goldman Sachs market strategist Abby Joseph Cohen said on March 28 that she cut the ratio of stocks to other assets in her portfolio, which also caused the markets to shudder.
In addition, the recent judge's ruling that Microsoft acted as a monopoly in the Web browser market further soured the bullish mood that led to recent gains, especially in the technology markets. The Nasdaq recorded a 349.15-point drop April 3--the day Judge Thomas Penfield Jackson released his ruling--which then ranked as its largest decline.
Some say that a huge drop may be what the markets need. "Some pain is going to have to be inflicted," said Tony Cecin, head of equity trading at U.S. Bancorp Piper Jaffray, who has worked in the financial industry since 1963.
"We need to break this casual attitude around stocks, this belief that you buy them and they always go up," he added.
The prevailing attitude had been highly speculative. "People don't invest (in a stock) for six to eight weeks or six to eight days; it's six to eight hours right now," said Bryan Piskorowski, a market strategist at Prudential.
Such speculation contributed to the massive run-up the markets experienced in the past year, as companies traded at multiples hundreds of times their earnings. In many cases the shares rose sharply even though the companies did not expect any earnings for months or years. "People carried the good up with the bad," said Mark Fitzgerald, a technology analyst at Merrill Lynch.
As a result, "last year was IPO nirvana, shares of Anything.com or e-anything went up," said American Express' Giglio. "People who didn't know the Internet from ice cream bought shares."
Others agree. "I believe hundreds of companies were priced as the next Microsoft," said Philip Dow, a market strategist at Dain Rauscher Wessels.
|Dow's biggest declines|
|Nasdaq's biggest declines|
But these days, even a great earnings report is not enough to buck the trend. Chipmaker Advanced Micro Devices posted spectacular earnings this week, and investors still dumped the stock. KLA-Tencor, a chip equipment maker, also took a hit after posting strong earnings.
"Investors don't pay you to meet earnings expectations, they pay you to destroy them," said Brian Rauscher, an investment strategist at Morgan Stanley.
The atmosphere of fear is forcing investors to make some hard choices. They "start to compare a start-up that makes no earnings to a company like Procter & Gamble and conclude that maybe blue chips aren't so bad," said Geri Hom, vice president and senior portfolio manager at Charles Schwab, who manages $20 billion in assets.
Many investment professionals said investors will start to pay more attention to profits and price-to-earnings ratios. "Those who buy quality now will be rewarded," said Richard Peterson, a market strategist at Thomson Financial. "But some of those dot-com cases are terminal."
Or, as Dow of Dain Rauscher put it: "When the sea goes out, you find out who is swimming naked."