The Dow fell 379.21, or nearly 4 percent, and closed within 33 points of 10,000, a level it first passed back in April 1999. The decline was the Dow's fifth-largest point drop in history.
Home Depot led the charge down and plunged $13.81, or 28 percent, to $35.13. The company reported a third-quarter profit of 28 cents a share; it was expected to earn 31 cents, the average estimate of analysts polled by First Call/Thomson Financial.
Meanwhile, the price of oil rose as much as 11 percent after a suspected bombing of a U.S. Navy ship in Yemen and the killing of two Israeli soldiers by Palestinians sparked concerns that the supply of oil from the Middle East might be disrupted.
"Investors are thinking, 'Oh my god, something's wrong here, so I'm going to sell whatever I have,'" said Andrew Abrams, a portfolio manager for CWH Associates. "The price of oil goes up if there's a war."
Said Bill Meehan, chief market analyst at Cantor Fitzgerald, "I think the markets reacted more violently to the Israelis attacking Arafat's headquarters."
In response to the soldiers' deaths, Israel helicopters launched a rocket attack on Palestinian leader Yassar Arafat's compound. "It's not good news when missiles start flying," Meehan said.
The Nasdaq fell 93.81, or 3 percent, to 3,074.68, erasing an early 81-point gain and setting a new low for the year. The Standard & Poor's 500 index lost 34.81 to 1,329.78.
Nearly three stocks fell for every one that rose on the Nasdaq, which generated a heavy volume of 2.12 billion shares. Volume on the New York Stock Exchange reached 1.36 billion with about three decliners for each stock that advanced.
The Middle East issue "adds to quite a bit of uncertainty over how oil prices will affect consumer demand," said Bob Gasser, head of U.S. equity trading at J.P. Morgan. Higher oil prices could hike prices throughout the economy and pinch corporate profits.
Gasser also said the current oil problems are a "clear indicator that investors are worried about a hard landing as opposed to a soft landing" for the economy.
Home Depot's earnings disappointment is just part of a slew of negative earnings news that has plagued the markets recently, and Meehan said he believes that the news indicates a widespread epidemic in the economy.
"Many of the companies that have warned or disappointed all share the same fates," he said. "These are problems that are far from company-specific that may have an effect on companies that have not reported."
The CNET tech index fell 84.50 to 2,457.70. Decliners surpassed advancers, with 74 of the 97 stocks in the index falling, 22 rising and one remaining unchanged.
Nearly all of the 18 sectors tracked by CNET Investor headed lower. Internet content companies and e-tailers posted the sharpest drops, falling 6 percent each. The telecom equipment sector was the day's only gainer, climbing 0.42 percent.
Chip stocks also fell. The Philadelphia semiconductor index lost 17.40 to 689.11, led by chip equipment maker Novellus, which lost $5.69, or about 13 percent, to $35.94. Intel rose $1.64 to $37.02.
Large cap tech stocks also headed lower. Yahoo fell $8.75 to $56.65; Sun Microsystems lost $3.94 to $97.94; Microsoft lost $1.38 to $54.38; and Cisco Systems fell $1.38 to $49.81.
Bloomberg News contributed to this report.