The Nasdaq composite index fell 53.16 to 3,858.96 on a relatively light volume of 1.3 billion shares, and Standard & Poor's 500 index dropped 4.70 to 1,450.55.
The Dow Jones industrial average also dropped 38.53 to close at 10,504.46 on moderate trading volume led by IBM. Big Blue dropped $4.66 to $109.75.
The Federal Open Market Committee meets today and tomorrow to discuss whether interest rates should be raised for the seventh time in the past 12 months. A decision will likely be released midday tomorrow, although most economists predict that the Fed will not raise rates.
"The economy has slowed enough to take pause, but not enough to permanently sideline the Fed," said Diane Swonk, chief economist at BankOne. "The economy is still very ripe for inflation."
Joe Abate, an economist at Lehman Brothers, concurred.
"I think the Fed will pass this time, with a bias to tighten (rates) in the future," he said.
The Fed "may want to kick back and wait for more data," said Greg Mount, senior economist at BankOne. Mount said that even though the Fed has received some data that show the economy is slowing, a recent report on jobs was less clear.
"Unemployment rose, and private industry stopped hiring," Mount said. "It was a pretty strange report considering that the economy has been growing so quickly."
The Fed also wants to take a gradualist approach and not shock the economy with too much medicine.
"Even though inflation may be accelerating, it's accelerating at low levels," Swonk said. "And the Fed doesn't want to run the risk of a recession or to appear overly aggressive."
On the eve of the decision, investors appeared unwilling to place large bets. Among the large tech companies, Intel closed down $2.81 at $131.38 today, and Microsoft dropped 69 cents to $78.81.
The CNET tech index lost 41.49 to close at 2,787.91. Losers edged out winners, with 69 of the 97 stocks in the index falling, 26 rising and two remaining unchanged.
Of the 18 sectors tracked, server hardware makers and PC hardware makers along with telecom equipment companies posted the sharpest drops, falling about 3 percent each. Server software makers were the day's largest gainers, climbing 8 percent.
The initial public offering of Marvell Technology Group, a maker of broadband circuits, was the biggest percentage gainer on Nasdaq today. The shares jumped $41.62, or about 288 percent, to close at $56.62.
Among members of the CNET tech index, Cypress Semiconductor and ADC Telecommunications posted losses. ADC fell $5.19 to $79.81, while Cypress dropped $4.50 to $41.50.
The Philadelphia semiconductor index fell 43.62 to 1,172.95, led by chip designer Rambus, which lost $8.75 to close at $108.63.