Updated from 4:14 p.m. EDT

Stocks fell sharply Tuesday as a weak outlook from

Wal-Mart

(WMT) - Get Report

and evidence of price inflation brought out the sellers, and the major averages closed near their lows of the day.

The

Dow Jones Industrial Average

dropped 120.93 points, or 1.14%, to 10,513.45, while the

S&P 500

fell 14.53 points, or 1.18%, to 1219.34. The

Nasdaq Composite

lost 29.98 points, or 1.38%, to 2137.06.

"Because we had such light volume, we were pushed around easier," says Robert Pavlik, portfolio manager with Oaktree Asset Management. "Less than stellar news with Wal-Mart just sunk us even further down. There wasn't much forcing hands to make people buyers."

About 1.37 billion shares changed hands on the

New York Stock Exchange

, with decliners beating advancers by a 2-to-1 margin. Trading volume on the Nasdaq was 1.53 billion shares, with decliners outpacing advancers 7 to 3.

In other markets, the 10-year Treasury was up 15/32 in price to yield 4.23% while the dollar was higher against the euro and the yen.

Oil was slightly weaker after easing Monday. In Nymex trading, crude for September delivery closed down 19 cents to $66.08 a barrel.

Wal-Mart, the world's biggest retailer, said second-quarter earnings rose 6% from a year ago to $2.8 billion, or 67 cents a share, beating estimates by 2 cents a share. Wal-Mart warned, however, that third-quarter earnings will be at least 2 cents a share light. The stock finished lower by $1.53, or 3.1%, to $47.57.

In addition to Wal-Mart, both

Caterpillar

(CAT) - Get Report

and

Exxon Mobil

(XOM) - Get Report

led the Dow to a lower close, each falling at least 2.2%.

One factor in Wal-Mart's weak outlook was the price of gasoline, which it said is crimping customer spending. High gasoline costs were also a reason the government's consumer price index for July came in higher than expected Tuesday, at 0.5%. Excluding food and energy prices, the index rose 0.1%.

"The big question in the marketplace is how much higher crude can go without affecting stocks or earnings," says Brian Williamson, equity trader with Boston Company Asset Management. "Coupled with very little news outside of economic news during summer vacation, we don't have much to help us higher."

In other economic news, housing starts fell 0.1% in July to an annual rate of 2.042 million units. Economists expected a rate of 2.023 million housing starts. The

Federal Reserve

said capacity utilization at U.S. factories was 79.7% in July vs. the 80.3% consensus, while industrial production rose less than expected at 0.1%.

Stronger sectors Tuesday included financials and airlines. Technology, energy, industrials, semiconductors and transportation were among the laggards.

"There seems to be some sector rotation," says Dave Briggs, head of equity trading with Federated. "There seems to be energy for sale and financials to buy. I'm cautious and defensive this time of year when you see a lot of activity because it means October will be a tougher time."

Tuesday saw a spate of chain store earnings.

Home Depot

(HD) - Get Report

topped estimates, saying second-quarter earnings rose 14% to $1.77 billion, or 82 cents a share. The store chain affirmed full-year sales guidance and bumped up earnings guidance. Still, shares of Home Depot lost 94 cents, or 2.3%, to $40.67.

BJ's Wholesale

(BJ) - Get Report

said second-quarter earnings were $30.5 million, or 44 cents a share, up from $28.0 million, or 40 cents a share, last year. Analysts had been forecasting 43 cents a share in the latest quarter. Shares of BJ's were off 46 cents, or 1.5%, to close at $29.92.

J.C. Penney

(JCP) - Get Report

reported second-quarter earnings of $122 million, or 46 cents a share, up from $68 million, or 22 cents a share, a year ago. Sales rose 5.4% to $3.98 billion, and same-store sales increased 4.2%. The Thomson First Call consensus was for EPS of 40 cents on revenue of $3.99 billion. The stock fell $2.16, or 4.2%, to $49.74.

Late Monday,

Gateway

( GTW) reported a profit of $17.2 million, or 5 cents a share, after a loss of $339 million, or 91 cents a share, a year ago. Excluding items, the company earned 3 cents a share, a penny ahead of estimates. Revenue rose to $873 million from $838 million, but fell short of analysts' $907 million estimate.

Bear Stearns cut Gateway to underperform from peer perform, citing light revenue and the company's reduced full-year outlook. Gateway lost 78 cents, or 20.1%, to $3.11.

Also late Monday,

Spire

(SPIR)

posted second-quarter earnings of $4.7 million, or 67 cents a share, more than tripling the year-ago results. The company said the jump in profit was due to the sale of a license related to the company's solar technology. Revenue rose 73% to $7.3 million from a year ago. Spire surged $2.76, or 34.3%, to $10.81.

Delta Air Lines

(DAL) - Get Report

will sell its Atlantic Southeast Airlines unit to

SkyWest

(SKYW) - Get Report

for $425 million to raise cash as it fights to avoid bankruptcy. However, the airline added that its liquidity would continue to decline substantially for the remainder of the year.

Fulcrum Global Partners downgraded Delta to sell from neutral, citing the increased likelihood of the airline filing for Chapter 11. Shares of Delta rose 19 cents, or 13.7%, to $1.58. SkyWest shares gained $2.97, or 13.5%, to $25.01.

Meanwhile,

Northwest Airlines

( NWAC) closed up 11.5% after Morgan Stanley upgraded the airline to overweight from equal-weight, saying it believes Northwest can successfully avoid bankruptcy. Shares were up 48 cents to $4.65.

RBC Capital Markets lowered its third-quarter revenue estimate for

Intel

(INTC) - Get Report

due to concerns over the impact of capacity constraints. The firm also trimmed its second-quarter revenue estimate to $10 billion from $10.2 billion. Intel shares lost 53 cents, or 2%, to $26.

Overseas markets were mixed, with London's FTSE 100 losing 0.4% to 5322 and Germany's Xetra Dax falling 0.8% to 4884. In Asia, Japan's Nikkei rose 0.5% overnight to 12,316, while Hong Kong's Hang Seng lost 0.2% to 15,444.

To view Aaron Task's video take on today's market, click here

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