Down nearly 140 points in early trading, the Nasdaq composite index made an abrupt U-turn to finish the day with a gain of 101.40 points, or nearly 3 percent, at 3,759.86. The Standard & Poor's 500 index climbed 13.86 to 1,452.56.
The Dow Jones industrial average moved up 19.05 to close at 10,706.58, led by Walt Disney, which rose $1.94 to $42.06.
At the end of regular trading, Intel closed up $1.75 at $65.06, and Microsoft inched 88 cents higher to $70.25.
Of the 18 sectors tracked, semiconductor equipment companies posted the largest drops, falling about 7 percent. Server hardware makers were the day's largest gainers, climbing 5 percent.
The sell-off in the semiconductor sector, which initially spread to the broader Nasdaq, came after an earnings warning from Kulicke & Soffa Industries. The chip-assembly equipment maker announced that delayed orders might hurt profits during the next two quarters.
The company's shares fell $5.50, or nearly 25 percent, to $16.63. The shares traded as low as $13.56, a new 52-week low. The company's 52-week high was $87.31. Volume reached 23.5 million shares, more than 27 times the stock's average daily volume of about 873,000.
"The markets are going through a negative sentiment period right now, and people are looking for any excuse to take some profits," said Brian Rauscher, an investment strategist at Morgan Stanley. "Expectations for the tech sector have been ratcheted up so high that they can't really go much higher."
Doug Kliggott, chief U.S. equity strategist at J.P. Morgan, said that sectors such as telecom equipment makers, software and semiconductors, which once propelled the markets to record highs, are now something of a drag on the markets.
"It's a combination of very, very high expectations based on phenomenal performances over the past few months and a quarter of disappointment" when earnings fell short or increased at a lower-than-expected rate, Kliggott said.
"The growth rates will still be pretty good, but not what investors have come to expect," he added. "The change in the (overall positive) rate of change will be negative."
Mark Fitzgerald, a semiconductor analyst at Banc of America Securities, said the notoriously volatile industry was still enjoying an upswing, despite Kulicke & Soffa's unexpected downward spike.
"The cycle is still intact, but we're seeing some inventory adjustments, and the very high growth rates of the past are not going to be sustainable," he said.
Min Pang, a semiconductor analyst and managing director at SG Cowen, downgraded Kulicke and test equipment maker Teradyne today. But he remained bullish on the overall semiconductor industry.
Pang's downgrade of Kulicke "is not a downgrade of the whole sector, just of two companies that will underperform over the short term," he said.
Pang cut Kulicke to "neutral" from "buy" and slashed Teradyne to "buy" from "strong buy." Teradyne fell $5.94, or nearly 10 percent, to $53.25.
Other semiconductor companies also slid on the downgrades. Credence Systems fell $9.75, or 20 percent, to $39. Asyst Technologies dropped $3.13, or 13 percent, to $20.19. KLA-Tencor dipped $6.06, or about 12 percent, to $44.69.
The Philadelphia semiconductor index fell 3.66 to 950.59, led by KLA, Teradyne and Novellus, which dropped $4.69, or nearly 9 percent, to $48.25.
Initial public offerings fared well. Resonate, a maker of Internet software, rose $15.13, or 72 percent, to $36.13 on the company's first day of trading.
SignalSoft, a company that makes software for wireless operators, made the second-highest gains on the Nasdaq. The company's IPO rose $4.88, or nearly 29 percent, to $21.88.
Shares of 3Com also had a big day. 3Com rose $2.50, or 17 percent, to $16.94 after company management told analysts that 3Com's shares could be valued around $37 to $54 apiece.
Broadcom made some healthy advances. The chipmaker rose $12.81, or about 6 percent, to $228.25. Nextel Communications rose $5.94, or 11 percent, to $59.69. Siebel Systems rose $11.75 to $161.88, and VeriSign climbed $18.75, or 13 percent, to $162.19.