The Nasdaq composite index fell as much as 214 points in early trading but managed to pare the losses as it closed down just 25.14 points at 3,803.73. The Standard & Poor's 500 index dropped 28 points earlier and recovered slightly to finish down 0.33 at 1,448.72.
The Dow Jones industrial average dropped 144 points at one point during the day, but roared into the green to close higher by 81.85 at 10,847.37.
"This is a market that has been conditioned to buy on the dips for the last four years," said Brian Belski, a market strategist at U.S. Bancorp Piper Jaffray.
For the week, the Dow and the Nasdaq were flat, while the S&P edged down 1 percent.
Volume was heavy today as about 2.16 billion shares exchanged hands on the Nasdaq. Investors swapped 1.17 billion shares on the New York Stock Exchange, about 17 percent more than the average daily volume.
Intel sparked the drop in the U.S. markets. Intel warned yesterday that third-quarter revenue will be below expectations, citing weaker demand in Europe. The chipmaker said revenue for the third quarter is likely to be only 3 percent to 5 percent higher than second-quarter revenue of $8.3 billion. Analysts previously forecast 8 percent to 12 percent revenue growth.
"This is like the mother of all bad news," said Richard Peterson, a market strategist at Thomson Financial Securities Data.
Todd Clark, head of listed trading at WR Hambrecht, said that other developments helped contain the dour Intel news.
The price of oil slipped slightly, decreasing investor fears that high energy prices might ignite inflation.
Additionally, the Federal Reserve, European Central Bank, Bank of Japan, and the Bank of England all agreed to intervene and prop up the price of the euro, which has fallen to news lows in recent weeks, sparking concerns over U.S. profits overseas.
AMG Data Services, a company that tracks money flows into mutual funds reported that investors pumped $7.6 billion into funds this week, the highest in 14 weeks.
The non-Intel news could help the market find a bottom and set the stage for a rise when earnings season starts in earnest next month, Peterson said.
At the end of regular trading, Intel closed down $13.55, or 22 percent, at $47.94. Volume topped 308 million shares, making Intel the most actively traded stock on the Nasdaq. Microsoft also dropped 94 cents to $63.25. Oracle rose $1.80 to $80.73, and Sun Microsystems climbed $1.63 to $118.06
The CNET tech index lost 8.83 to close at 2,987.82. Winners edged out losers, with 48 of the 97 stocks in the index rising, 47 falling and two remaining unchanged.
Of the 18 sectors tracked by CNET Investor, semiconductor companies posted the sharpest drops, falling nearly 5 percent. Computer data storage makers were the day's biggest gainers, climbing 5 percent.
The Philadelphia semiconductor index fell 57.98, or nearly 6 percent, to 926.53 led by Intel.
Chip equipment makers KLA-Tencor fell $5.94, or 12 percent, to $43.38, and Novellus Systems lost $5.81, or about 10 percent, to $52.75. Chipmaker Advanced Micro Devices rose $1.56 to $25.50, reversing yesterday's after-hours decline of nearly $4.
On the bright side, the initial public offering of Inrange Technologies, a networking and switching equipment company, was the biggest percentage gainer on the Nasdaq. The shares jumped $30.25, or 189 percent, to $46.25.
Computer storage stocks also managed to make some gains. EMC rose $5.69 to $101.44; Network Appliance climbed $10.88 to $147.38, and Brocade Communications Systems gained $20.91 to $253.9, setting a new 52-week high of $253.94 compared to the low of $43.50 over the same period.
Among members of the CNET tech index, Adaptec posted losses while Nokia and Seagate Technology made gains.
Adaptec lost $2.44, or about 11 percent, to $20.63 while Nokia rose $3.88 to $43.75, and Seagate climbed $7.81 to $66.31
Intel's warning also hit the shares of some PC makers. Dell Computer fell $2 to $35.94.
PC maker Gateway rose $4.50 to $55.50, and IBM climbed $2.56 to $124.06.
Speaking today at the Banc of America Securities conference in San Francisco, Gateway chief financial officer John Todd said that before entering a pre-earnings "quiet period" this week, the company said it was on track to meet Wall Street's earnings estimates.