The markets "ran too far, too fast, and we've spent the past couple of days paying for our sins over the last couple of weeks," Prudential market strategist Bryan Piskorowski said.
The Nasdaq composite index fell 121.54 to 4,055.63. The Nasdaq crawled up about 7 percent over the previous two weeks, but it has fallen 4 percent since Monday.
The Dow Jones industrial average fell 43.84 to close at 10,696.08. The Standard & Poor's 500 index dropped 11.78 to 1,481.96.
Earnings news from Microsoft played a major role in driving the markets downward.
At the end of regular trading, the software giant fell $5.38 to $73.13 on a volume of about 70 million shares, making it the most actively traded stock on the Nasdaq. Microsoft is also a component in the Dow Jones index.
Three analysts downgraded ratings on Microsoft today to "sell," "accumulate" and "neutral" after the world's largest software maker announced a nine percent increase in earnings--its slowest growth rate in five years.
Intel also closed down $4.88 at $138.13 after reporting earnings. Volume topped 36 million shares making the stock the second most actively traded stock on the Nasdaq.
The CNET tech index lost 60.03 to close at 2,926.13. Losers beat out winners, with 76 of the 97 stocks in the index falling and 21 rising.
Of the 18 sectors tracked, PC software companies posted the sharpest drops, falling 6 percent. Computer memory storage makers were the day's largest gainers, climbing about 3 percent.
Among members of the CNET tech index, Veritas Software and RealNetworks posted strong losses after reporting earnings.
Veritas fell $15.31, or 12 percent, to $112.25. The company's second-quarter performance fell short of some investors' sales expectations.
Analyst support could not save RealNetworks from the wrath of the markets. The software maker posted strong revenue, but the shares dropped $9, or about 16 percent, to $49, even though analysts left their ratings unchanged.
Shares of DoubleClick also had a rough day after the Internet advertising company reported earnings that displeased some investors. The stock fell $2.69 to $32.81 as some analysts revised their ratings downward.
Digital Microwave and Foundry Networks also fared badly after the companies reported earnings. Digital Microwave fell $8.31, or almost 20 percent, to $33.50. Foundry Networks slid $26, or almost 21 percent, to $98.13.
In a positive sign for IPOs, the initial public offering of Support.com made the biggest percentage gains on the Nasdaq today. The provider of technical support software for businesses rose $18.63, or 133 percent, to $32.63.
The first day of trading for biotech company Argonaut Technologies was also strong. The 4.6 million shares offering rose $8.44, or 56 percent, to $23.44, amid investors' general renewedexuberance for new players in the biotech niche. The San Carlos, Calif.-based company makes scientific instruments enabling chemists to use synthesizers to develop new drugs.
Shares of ZDNet and parent company Ziff-Davis rose after CNET Networks, the publisher of News.com, announced that it will acquire the companies for $1.6 billion. ZDNet rose $4, or about 31 percent, to $16.88, while Ziff Davis climbed $1.88, or 16 percent, to $13.25. CNET fell $2.50, or nearly 8 percent, to $29.69.
The Philadelphia semiconductor index fell 47.31, or about 4 percent, to 1,160.42, led by chip equipment maker KLA-Tencor, which lost $5.31 to close at $54.75.