The Nasdaq composite index closed down 93.29, or 3 percent, at 2,796.51, and the Standard & Poor's 500 index dropped 25.08, or almost 2 percent, to 1,351.46. The Dow Jones industrial average fell 234.34, or 2 percent, to 10,664.38.
About eight stocks declined for every five that advanced on the Nasdaq, which generated a volume of 2.3 billion shares. Volume on the New York Stock Exchange reached a heavy 1.4 billion shares as four stocks rose for every three that fell.
On Tuesday, the Nasdaq jumped 10.5 percent, its largest single-day percentage gain ever after Federal Reserve Chairman Alan Greenspan suggested that the Fed may be finished raising interest rates.
Despite the rally, some investors viewed today's performance as more proof of turmoil during the final month of the year. The markets "will have a colossal tug of war between the forces that want stocks to go higher and the fundamental (earnings) news that comes out," said Bill Meehan, chief market analyst at Cantor Fitzgerald.
Investors received more economic reports from the government Wednesday that showed the productivity of American workers continues to rise but labor costs might be eating into benefits.
The Labor Department said nonfarm productivity rose 3.3 percent, slightly lower than last month's preliminary estimate of 3.8 percent, and significantly below the 6.1 percent rise in the second quarter. Productivity, or output per hour of all workers, rose 2.9 percent in 1999 and 2.6 percent in 1998.
The department said that unit labor costs, a key measure of wage pressures, climbed 2.9 percent in the third quarter, the fastest pace since a 4.3 percent jump in the April-June quarter of 1999. The new third-quarter figure was revised upward from an original estimate of a 2.5 percent increase in labor costs.
The jump in labor costs could be a worrisome sign to the Fed. The short supply of labor has driven up costs and may force firms to raise prices, which could cause inflation to accelerate. Yet businesses may be caught in a bind if slow demand rules out the option of raising prices.
"Faced with general lack of pricing power associated with slowing product demand, the higher operating costs (are) likely squeezing profit margins," Mickey Levy, chief economist at Banc of America Securities wrote in a report. Levy thinks slower output from business will reduce productivity gains "and exert more pressure on (labor costs)."
Many technology stocks were sacked by Apple, which announced Tuesday after the markets closed that sales will fall "substantially" below already-lowered forecasts, pushing the company into the red for the first time in three years. The shares closed down $2.69, or nearly 16 percent, at $14.31 and set a new 52-week low of $14 compared with a high of $75.19.
The Macintosh maker said late Tuesday it expects to report quarterly revenue of about $1 billion--$600 million below its prior forecast--and a net loss, excluding investment gains, between $225 million and $250 million when it reports final results Jan. 17.
Other computer makers also fell. Dell Computer slipped $2.25, or 11 percent, to $18; Hewlett-Packard dropped $3, or about 9 percent, to $32; IBM declined $6.63 to $96.75; Gateway lost $1.96, or 10 percent, to $16.82; and Compaq Computer stumbled $4.30, or almost 18 percent, to $20.10.
The news also spilled over into the chip sector. The Philadelphia semiconductor index fell 27.32, or about 5 percent, to 580.90, led by Intel, which dropped $4.25, or almost 12 percent, to $31.75. The chipmaker traded as low as $31.25, a new 52-week low, compared to a high of $75.81.
Of the 18 sectors tracked by CNET Investor, PC hardware makers posted the sharpest declines, falling nearly 9 percent. Wireless companies were the day's only gainers, climbing 0.43 percent.
The CNET tech index fell 68.88 to 2,356.04. Decliners led advancers, with 66 of the 97 stocks in the index falling, 28 rising and three remaining unchanged.
Among members of the index, Yahoo fell $6.38, or about 15 percent, to $37.50. Merrill Lynch Internet analyst Henry Blodget cut revenue estimates for the Web portal giant because of the "lousy" environment for online advertising.
Diamond Tech Partners fell $11.06, or 28 percent, to $28.44 after Lehman Brothers analyst Karl Keirstead cut his 12-month price target on the Internet consulting company to $50 a share from $95.
Some tech companies saw gains. Accord Networks rose $7.06, or almost 110 percent, to $13.50 making it the largest percentage gainer on the Nasdaq.
Polycom, a maker of audio and video data-conferencing equipment, announced that it will buy Accord for about $339 million in stock to gain its Internet-based conferencing products. Polycom shares fell 13 cents to $46.