(Updated from 2:26 p.m.)

Investors sliced into Thursday's gains in trading today, sending the major indices spiraling lower. Already unconvinced by the record-breaking rally, they were further disappointed by last night's earnings warnings and this morning's weak

employment report.

Dip-buyers came in off the sidelines near midmorning, stemming the downward flow for a while. The selling stepped up at midday, then the major indices rallied back a bit, but now they are as negative, or worse, than their session lows.

In late afternoon trading, the

Dow was off about 160 points, the

Nasdaq Composite Index was down about 75 and the

S&P 500 was down 28. At its session lows, the Dow was down 194 points. The Comp and S&P have broken through their earlier lows. Volume was moderate to active, and breadth was not good. Decliners were beating advancers by 2 to 1 on the Nasdaq, and by 21 to 8 on the

NYSE, or the Big Board.

Just a few of the most defensive sectors, or those regarded as safer, were moving to the upside, including gold, drugs and tobacco, as well as biotechnology. The poorest performers today were the semiconductors and Internet stocks.

The lackluster jobs figures may have prompted a bit of optimism, seeing as it makes it more likely that the

Federal Reserve will intervene in the markets sooner rather than later. Nonfarm payrolls dropped 86,000 in March, well short of expectations for a 58,000 gain. Weakness was widespread, fueling a bond rally based in part

on the notion of imminent Fed action.

Merrill Lynch

issued a report this morning suggesting that the weak employment data could spur more aggressive, and even intermeeting cuts by the Fed -- possibly a cut of as much as 50 basis points next week.

Fed officials, in their comments, seem guarded. Obviously, more deterioration in economic reports would prompt them to act more quickly, but there's the chance that comments like those at Merrill could cause the market to engage in a self-hating, self-fulfilling

prophecy, in which it feeds on itself if it doesn't get the requisite rate cut.

"It could happen," said Phil Dow, director of equity strategy at

Dain Rauscher

, with regards to a rate cut. "They did say they weren't planning an intermeeting cut, but you're dealing with a long period between (policy) meetings, and they've said they're watching the numbers diligently." The Fed next meets May 15.

Some traders said optimism over the possibility of rate cuts next week could spur a rebound this afternoon, but it didn't come true.

Any rebound in this group could indicate that stocks were on their way back; financial stocks don't just react to their own fundamentals, but also reflect anticipated trends in borrowing and loan activity. Indices that track the banks and insurance companies were lately adding to earlier losses, and the brokerage index was sinking further into the red. A look at some key financial-services indices, however, indicated, that a financials rally wasn't in the offing yet: The

Philadelphia Stock Exchange/KBW Index

was lately down 3.6%, the

S&P Insurance Index

was falling 2.2%, and the

TheStreet Recommends

American Stock Exchange Broker/Dealer Index

was down 3.7%.

The

jobs report showed a steep drop off in payrolls in March, with the services and manufacturing sectors both dragging on the economy. After recent improvements in consumer confidence indicators, investors had been hoping the report might show the economy wasn't recession-bound after all.

Last night's earnings disappointments came from

optical-networker

Sycamore Networks

(SCMR)

, switchmaker

Extreme Networks

(EXTR) - Get Extreme Networks, Inc. Report

and technology services company

Agilent Technologies

(A) - Get Agilent Technologies, Inc. Report

, among others. Sycamore was lately down 20.3% to $7.22; Extreme was down 9.1% to $14.55; and Agilent was down 10.8% to $27.30.

Warning: Truck Aimed at Your Head

With almost a week past since the end of first quarter, yesterday's bulls may have been hoping that all the warnings were done with -- that all the bad news was out. But that is far from clear. A recovery in earnings and the economy in general is still being forecast for the end of the year -- and there's no indication as to whether it will happen even then.

The depth and breadth of recent selling and the momentum of yesterday's rally indicated to some that it may have been a bear market rally led by short-covering, or aggressive buying by investors who

short stocks. Investors short stocks, or borrow and then sell them, when they think the stocks are going to go down. If those borrowed shares make a sudden move to the upside, the shorts rush in and "cover" their positions, or buy back the shares before they get too expensive and incur losses.

Still, the bulls say yesterday's bounce is at least an indication that the market may have

successfully retested its lows and is finally beginning to build a bottom. Investors sold stocks furiously during March and the first few days of April, and some think the market can't go any lower. The Nasdaq is now 65% off its highs of last March; the S&P 500 is down 25% and the Dow is down 15%.

The Dow rose 402.62, or 4.2%, Thursday, its second-biggest point gain ever. The

S&P 500 gained 4.4%, and the

Nasdaq Composite soared 8.9%, its third-largest percentage gain ever. The rally was fueled in part by an announcement from PC maker

Dell

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, which said it expected to meet lowered first-quarter earnings targets, as well as by a lack of any new earnings warnings from market bellwethers. Unfortunately, Dell's announcement didn't tell investors anything about its earnings picture going forward.

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