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Nasdaq rally fizzles out

The index's recent rally runs out of steam despite a better-than-expected report about unemployment.

The Nasdaq's recent rally ran out of steam Friday, despite a better-than-expected report about unemployment.

The Nasdaq composite index fell 21.05 to 2,066.33, and the Dow Jones industrial average slipped 38.40 to 10,512.78.

Semiconductor stocks--which had been fueling the Nasdaq rally for the past two days following a report from Merrill Lynch that predicted the sector had hit bottom--were hit hard. CNET's Semiconductor index slid 2.26 percent.

CNET's Server Hardware index fell 2.13 percent.

Friday's economic report showed that the U.S. unemployment rate was 4.5 percent in July, which matched June's level but was up from 4.4 percent in May. The results beat economists' forecast that 50,000 jobs would be cut and that the unemployment rate would rise to 4.6 percent.

But analysts said that, as with Thursday's report on jobless claims, the numbers could be misleading.

"Taken at face value (jobless) claims suggest the labor markets are bottoming and that some type of recovery is under way. We are not so sure. The other indicators that we follow suggest the labor markets are pretty weak," wrote Deutsche Banc Alex Brown analyst Peter Hooper in a research note Friday morning. Besides, the number just missed being rounded up to 4.6 percent, Hooper noted.

Motorola tumbled 77 cents to $18.63 after a downgrade from Morgan Stanley to "outperform" from "strong buy." Analysts said the company's shares, which have surged 68 percent since the beginning of April, are too pricey.

Exodus Communications was one of the Nasdaq's gainers. Shares in the provider of outsourced data storage rose 36 cents, or 28 percent, to $1.65, and was one of the most actively traded stocks on the Nasdaq. Business Week Online reported that the company may have hit a bottom.

Among other heavily traded tech stocks, Oracle fell 31 cents to $18, Cisco Systems slipped 20 cents to $20.05 and Sun Microsystems fell 45 cents to $17.72.

Amazon.com slid 4 cents to $12.15, AOL Time Warner fell 12 cents to $46.88 and Yahoo fell 58 cents to $17.87.

Staff and Reuters contributed to this report.