Updated from 12:43 p.m. EST

Stocks continued to lose ground in afternoon trading, as worries about a war with Iraq took center stage after a two-day break.

The

Dow Jones Industrial Average

was last down 83 points, or 1%, to 7958 while the

Nasdaq

was off by 19 points, or 1.39%, to 1327. The

S&P 500

shed 9 points, or 1.11%, to 841. The Dow climbed almost 300 points over the last two trading days while the Nasdaq jumped 5%, as traders covered short positions after almost five weeks of losses.

Most sectors retreated on Wednesday, with techs, retailers and financials all in the red.

"Renewed concerns of an imminent war with Iraq have come back into the fold," said Bryan Piskorowski, market analyst at Prudential Securities. "We're back on the defensive but the losses are moderate."

Adding to the cautious tone were reports that U.S. and British intelligence agencies have been tracking three ships that left an Iraqi port shortly after U.N. weapons inspections began. A British newspaper said officials worry the vessels, which have been sailing the open ocean for months, could be carrying illicit weapons.

Elsewhere, NATO approved the deployment of Awacs radar aircraft, Patriot missile systems and chemical-biological response units to Turkey.

The U.S. intends to issue a new Security Council resolution this week that would declare Iraq in "further material breach" of U.N. demands to disarm. If approved, that could clear a path to war.

An upgrade in the chip sector had little impact on the overall market Wednesday. Morgan Stanley analyst Mark Edelston upgraded shares of

Intel

(INTC) - Get Report

,

Texas Instruments

(TXN) - Get Report

and

Xilinx

(XLNX) - Get Report

to overweight from equal-weight, saying the risk to reward ratio has recently improved. Intel CEO Craig Barrett also said Tuesday that demand for innovation in the industry will remain strong, even amid a slow economy.

Despite this optimism, the semiconductor capital equipment book-to-bill ratio for January came in at 0.92, representing a decline from December's reading of 0.94. A book-to-bill of 0.92 means $92 worth of new orders were received for every $100 of product billed for the month.

Meanwhile, Goldman Sachs initiated coverage of the semiconductor sector with a neutral rating, saying valuations are not universally cheap.

Shares of

Nokia

(NOK) - Get Report

were under pressure after Wachovia downgraded the stock saying the demand for replacement handsets could be weaker than expected over the next quarter. Nokia shed 2.7% to $13.87.

Dell Computer

(DELL) - Get Report

slipped 2% to $25.82 after Goldman Sachs raised concerns about the firm's premium valuation.

On the economic front, U.S. housing starts for January came in above expectations, at an annualized rate of 1.85 million, 2% above December's 1.84 million. The market consensus was for 1.77 million new homes. But permits for new building, a harbinger for future activity, fell 5.6% to a 1.781 million annualized rate, shortly below consensus.

In earnings news,

Qwest

(Q)

posted a fourth-quarter profit thanks to money it received for its telephone directory business but said revenue fell 11% from a year ago. Adjusted for discontinued operations and other items, Qwest posted a loss that was about 9 cents a share narrower than expected.

Drug giant

Pharmacia

( PHA) said earnings rose to 41 cents a share on a slight increase in revenue as its pain medications Celebrex and Bextra continued to sell well. Sales grew 1% to $3.7 billion in the fourth quarter. Pharmacia's earnings were in line with expectations, excluding various items.

On the M&A scene,

Wachovia Corp.

(WB) - Get Report

and

Prudential Financial

(PRU) - Get Report

confirmed they will merge their retail brokerage units. Prudential now expects 2003 earnings per share of $2.25 to $2.40 a share, including a 25-cent charge, compared with a consensus estimate of $2.52.

In the bond market, treasuries prices rose, with the 10-year note up 3/8 to yield 3.90%.

The dollar fell against the euro after three days of gains on concerns over the timing of a U.S attack against Iraq. The dollar continued to lose ground against the yen for a second consecutive day.

March crude oil futures rose 37 cents to $37.23 a barrel.

Overseas markets posted declines, with London's FTSE 100 downalmost 2% to 3658 and Germany's Xetra DAX declining 4% to 2627. In Asia, bourses had a mixed session, with Japan's Nikkei losing 0.17% to close at 8678, while Hong Kong's Hang Seng moved up 0.33% to 9427.