The Nasdaq composite index was off 53.37 to 1,705.64, and the Dow Jones industrial average fell 192.43 to 9,840.84.
Software stocks took a hit in trading after business-to-business software company Manugistics Group on Wednesday announced that its second-quarter results would come in way below expectations, largely because of a struggling economy.
The concern among analysts and investors was that the problems were not limited to Manugistics. "We expect application companies with September quarters to post disappointing results and only hope that our 'Street Low' numbers are low enough," wrote Banc of America Securities analyst Bob Austrian. "In these difficult macroeconomic conditions, (a) sequential increase in software demand is unlikely over the next six to 12 months."
Manugistics shares lost almost a third of their value, falling $3.16 to $7.80. Other software companies felt the pain as well: Oracle was down $1.02 to $11.05, SAP was off $3 to $28.30, BEA Systems fell 89 cents to $13.57 and i2 Technologies lost 40 cents to $5.23. CNET's Server Software index was off more than 7 percent.
Microsoft shares lost $1.72 to close at $56.02 after the Department of Justice said it will not try to break up the company. In a statement issued Thursday, the government said it would try to settle the case as quickly as possible and would not pursue an unresolved claim that the company illegally tied its Internet Explorer browser to its Windows operating system.
In its statement, the Justice Department said it is "taking these steps in an effort to obtain prompt, effective and certain relief for consumers." But it added that it was asking the court for time to "investigate developments in the industry since the trial concluded, and to evaluate whether additional conduct-related provisions are necessary, especially in the absence of a breakup."
In Microsoft financial news, Chief Financial Officer John Connors cleared up confusion over whether the company had or had not reaffirmed revenue guidance for its fiscal year. Statements he made at an SG Cowen technology conference Wednesday were apparently misinterpreted, but at the Salomon Smith Barney Tech2001 Industry Conference in New York on Thursday, Connors said the company has not updated its guidance since its July analysts' meeting.
Thursday morning, Salomon Smith Barney analyst Richard Gardner said in a research note that during a dinner meeting with Connors, the CFO "was very clear" that he had not reaffirmed guidance but "simply commented that Microsoft has not updated its guidance since July."
Motorola sank $2.46 to $56.02 after it warned investors that third-quarter sales would likely be flat compared with the second quarter, instead of the five percent increase it had previously expected. The wireless company also said it expects to lose 5 cents to 8 cents per share in the quarter, smaller than the loss it posted in the second quarter but a wider range than analysts had been looking for.
Yahoo shares rose 46 cents to $11.10 after Lehman Brothers analyst Holly Becker said the recent slump represented a buying opportunity. Becker said it's unlikely the company will record a shortfall in third-quarter earnings and that while the complete recovery is probably still a few quarters off, the near-term downside is limited.
The other tech giant on the minds of investors was Intel, which is scheduled to present its midquarter update to analysts after the market closes Thursday. Analysts expect the company to lower its sales guidance for the third quarter to the bottom of a range it gave earlier. Intel shares were off $1.37 to $ 26.10.
Among other heavily traded tech issues, Sun Microsystems lost 17 cents to $10.46, WorldCom lost 6 cents to $13.29 and Cisco Systems was down 46 cents to $14.40.
Amazon.com was up 50 cents to $8.15, AOL Time Warner fell $1.66 to $35.09 and eBay gained 44 cents to $55.09.
Staff and Reuters contributed to this report.