The Nasdaq composite index closed down 49.95, or nearly 2 percent, at 2,566.84, and the Standard & Poor's 500 index dipped 14.22 to 1,333.34. The Dow Jones industrial average lost 33.34 to 10,912.41.
Despite the downturn, investors remained busy. Volume on the Nasdaq reached 2.6 billion shares, its seventh largest day ever, as 11 stocks advanced for every nine that declined. The New York Stock Exchange also generated a heavy volume of 2.1 billion shares.
Analysts attributed the heavy volume to investors who were eager to snatch profits after Wednesday's rally. The Nasdaq leaped 14.17 percent Wednesday, its largest percentage gain ever on a volume of 3.1 billion shares, also a record high.
More bearish Wall Street veterans theorized that investors were bailing out to avoid what they think may be a broader stock market fallout on Friday. The Labor Department is expected to release a wide-ranging employment report Friday, and the Fed will scrutinize it to determine the soundness of the U.S. economy and whether it should further slash interest rates.
"There was some distribution going on today; the markets are also waiting on tomorrow's employment numbers," said Dan Schaub, head of equity trading at A.G. Edwards.
Other analysts said that Thursday's slump is a result of a seemingly unshakable, negative sentiment among investors. Although interest rate cuts usually spark rallies and economic euphoria, many people interpreted Wednesday's cut as a sign that the economy had slowed too quickly and that the Fed was making a last-ditch effort to avoid a full-blown recession.
It's unclear exactly what Fed Chairman Alan Greenspan was thinking when he initiated the cut.
"Alan Greenspan is very good at using the element of surprise," said Phil Dow, a market strategist at Dain Rauscher Wessels.
Dow added that the market will probably not gain much ground in the short term because investor sentiment is still heavily negative, and a raft of corporate earnings warnings paint a grim picture for upcoming fourth-quarter financial reports.
"The market has still got to get through some disappointments," said Dow, who believes tech stocks may rebound in upcoming quarters. "At some point, the tide sways to thinking about what can go right rather than what can go wrong."
Tech titans made early gains but turned in a mixed performance by the end of regular trading.
Cisco Systems rose 56 cents to $41.88; Microsoft gained 50 cents to $48.44; and America Online advanced $4.68, or 12 percent, to $42.18. Time Warner, AOL's merger partner, also jumped $7.43, or 13 percent, to $63.70.
Other large cap stocks did not fare as well. WorldCom slipped 56 cents to $19.44; Sun Microsystems fell $2 to $31; and JDS Uniphase lost $5.75, or almost 11 percent, to $47.88.
The CNET tech index inched up 9.86 to 2,184.30. Advancers edged out decliners, with 53 of the 97 stocks in the index rising and 44 falling.
Of the 18 sectors tracked by CNET Investor, Internet content companies were the day's largest gainers, climbing 7 percent. Server hardware makers posted the sharpest drops, falling nearly 6 percent.
Earnings news gave many stocks a jolt.
BMC Software jumped Thursday after announcing its third-quarter results would beat expectations. But analysts still cautioned that the company and its competitors face several formidable challenges. The maker of software for mainframes rose $6.69, or almost 43 percent, to $22.31.
BMC's luck rubbed off on other companies in its sectors. Compuware rose $1.19, or 15 percent, to $8.94, and Computer Associates gained $4.56, or 21 percent, to $25.88.
Shares of Resonate were not as fortunate, falling $7.50, or almost 67 percent, to $3.75. The software maker said it expects to report fourth-quarter revenue of $5.1 million to $5.4 million. The company reported $6.1 million in revenue for the third quarter and was expected to have revenue of $7 million, the average estimate of four analysts polled by IBES International, according to Bloomberg News.
Investors also sent software maker Inktomi to earnings purgatory. Inktomi fell $4.63, or 25 percent, to $13.88, after the company announced that earnings and revenue would not meet previous company expectations.
The company announced Wednesday after the markets closed that it will post breakeven to a 1 cent per share profit, on revenue of $80 million to $81 million in the first quarter ending Dec. 31. The company previously expected to earn 2 cents to 3 cents per share, on revenue of $89 million to $91 million.
Traders also pummeled shares of Vitria Technology, which fell $4.03, or 50 percent, to $3.97. The e-business software provider announced that it would post an unexpected fourth-quarter loss because of canceled orders.
Online auctioneer eBay fell $3.97, or 10 percent, to $35.38. The Web site suffered an outage for nearly 11 hours Wednesday caused by a series of failures that affected both the company's primary and backup systems.