Technology stocks were hit hard again yesterday in a sell-off led by software giant Microsoft Corp., although blue-chip stocks erased an early decline to end the day higher.
The Nasdaq composite index fell 161.40 points, or 4.43 percent, to finish the day at 3,482.48, and only a late-afternoon buying binge kept it from being much worse. That index, which is heavily weighted in technology stocks, had fallen nearly 300 points, or 8 percent, before the rally pared the loss by a third.
Microsoft headlined the fall. The stock dropped $12.3125 a share, closing at $66.625, after disclosing that its sales growth is slowing. Reports surfaced that government antitrust lawyers want the world's biggest software company broken up, and an influential analyst downgraded the stock to "market perform" from "recommended list."
Some market experts say the investors used the bad news to justify their sales of technology stocks which remain overvalued even though the Nasdaq has fallen 14 percent so far this year.
"I think Microsoft is the excuse for it, but I don't think it's the [real] reason for it," said Robert Mewshaw, president of VanSant and Mewshaw Inc., a money-management firm based in Lutherville.
The Dow Jones industrial average erased a 1.4-percent drop to rise 62.05 points, or 0.57 percent, ending the trading session at 10,906.10. The Standard & Poor's 500 index fell only 4.68 points, or 0.33 percent, to close at 1,429.86.
The Dow is down 5.1 percent this year, though it has been down as much as 18 percent from its all-time high set Jan. 14.
Four stocks fell for every three that rose on the New York Stock Exchange yesterday. This so-called lack of breadth in an advance is usually considered a key sign of an unhealthy market for stocks. While technology stocks fell, chemical, oil and consumer-products stocks gained.
Gil Knight, a principal with Allied Investment Advisors in Baltimore, said the small drop in the S&P; index -- to which Microsoft belongs -- is proof that investors are selling technology stocks only to reinvest the proceeds in the blue-chip stocks of big companies.
Microsoft is also a newly appointed member of the Dow: Without its decline, that 30-stock index would nearly have doubled its gain yesterday and risen 123 points.
Elsewhere on the broad market, the Russell 2000 index, a benchmark of small-cap stocks, slipped 13.30 to 468.54; the Wilshire 5000 index dropped 122.90 to 13,126.54; the American Stock Exchange composite index declined 16.92 to 880.72; the New York Stock Exchange composite index was up 2.77 to 642.18; and the S&P; 400 midcap index dipped 6.01 to 454.84.
The Sun-Bloomberg Maryland index of the top 100 Maryland stocks fell 5.38 to 218.48, led by technology stocks MedImmune Inc., off $16 to $128.785, and Ciena Corp., down $6.50 to $90.50.
The big drop-off in technology shares is "really shaking people up," Knight said. And the carnage is much worse than most investors realize, Knight said, noting a recent report by an independent research firm that details the damage to key Internet stock sectors.
For instance, electronic retailing stocks are down 75 percent, media/portal stocks 72 percent, Internet-financing shares 71 percent, business-to-business shares 71 percent and Web-design and implementation services stocks 71 percent.
Neither Knight nor Mewshaw thinks the bloodletting in the technology arena is over. In fact, Mewshaw continues to think that blue-chip shares are overvalued, too.
Michael Lyons, a trader for Morgan Stanley Dean Witter & Co., said the Nasdaq would likely fall more from here.
"The Nasdaq broke through 3,500, it looks like it's going through 3,400 and, while it's not in a free fall, it is going lower," he said.
While technology stocks dropped, blue-chip financial stocks attracted some buying interest, lifting the Dow from its lows.
American Express Co. rose $7.0625 to $150.0625 after it reported earnings that surpassed Wall Street's expectations.
Investors continued buying into the reviving drug sector. Warner-Lambert rose $4.6875 to $118.125, and Merck gained $2.1875 to $71.9375 after reporting first-quarter profit of 63 cents per share, beating Wall Street forecasts by a penny.
Traders said that with technology stocks slipping, investors seem to be turning toward the drug sector as a less-volatile growth industry.
Bloomberg News and the Associated Press contributed to this article.