Updated from 4:04 p.m. EDT

Stocks finished sharply lower Tuesday as another terrorist bombing in the Middle East and rumors about a possible negative research report on

Cisco

(CSCO) - Get Report

erased the enthusiasm that had lifted the averages to solid gains in the first half of the session.

The

Dow Jones Industrial Average closed with a loss of 128.14 points, or 1.3%, to 9517.26. The

Nasdaq dropped 33.51 points, or 2.2%, to 1497.18, and the

S&P 500 fell 17.14 points, or 1.7%, to 1013.60.

In morning trading, the Dow had reached as high as 9758.80, while the Nasdaq rose to 1547.50.

Nokia

(NOK) - Get Report

was the big story of the first part of the day. The cell-phone maker

painted a mixed picture in its midquarter update, warning that it wouldn't meet its sales growth target for the second quarter, but remaining confident it would reach earnings estimates.

Shares were lower overseas immediately following the announcement, but the stock gained almost 5% to $12.55 at the 4 p.m. EDT New York close.

Traders originally focused on the positives in Nokia's outlook, but by early afternoon buying interest had faded. The catalysts seemed to be a rumor that Salomon Smith Barney was preparing a negative research note on Cisco, which the firm later denied, and another suicide bombing in Israel. In the latest bombing, a patron blew himself up in a restaurant in Herzliya, near Tel Aviv. At least 15 people were injured in the explosion, according to reports.

Nokia wasn't the only wireless outfit with news, as

Nextel Communications

(NXTL)

reaffirmed its 2002 earnings before interest, taxes, depreciation and amortization forecast of at least $2.5 billion. Shares of Nextel rose 16.6% to $4.42.

Overall, the entire wireless sector was weaker. The Dow Jones U.S. Wireless Communications Index lost 1.2% to finish at a 52-week low.

One notable company that struggled following Nokia's update was

Ericsson

(ERICY)

, which tumbled 8.6% to $1.81. Nokia said it now expects network infrastructure sales to decline 20% to 25%, compared with a previous estimate of drop of 5% to 10%. Investors took that as a bad sign for Ericsson, which derives 60% to 70% of its revenue from network sales.

The drug sector was producing a host of news, including a warning from

Abbott Labs

(ABT) - Get Report

. The company lowered its guidance for both the second quarter and full year, sending it lower by 16% to $38.30.

Elsewhere, the Internal Revenue Service and

GlaxoSmithKline

(GSK) - Get Report

are engaged in a dispute over allegations that the British pharmaceutical firm avoided paying U.S. taxes on billions of dollars in drug sales over the last 10 years. Glaxo was down 4.6% to $39.12.

The IRS hasn't formally charged Glaxo with tax evasion, but reports indicate that the agency is likely to pursue litigation in the matter.

Separately, the FDA reportedly raised serious questions about

ImClone's

(IMCL)

experimental cancer drug Erbitux more than two weeks before regulators rejected the company's application, according to sources close to the matter.

Relatives of erstwhile chief executive Samuel Waksal unloaded shares in the company prior to the decision, raising concerns about potential illegal selling. ImClone said Tuesday that its filing for Erbitux was flawed and acknowledged that the episode had damaged the company's credibility. ImClone's shares closed down 1.7% at $7.55.

Tyco

(TYC)

, which Monday fired its general counsel Mark Belnick on the same day Fitch downgraded its debt to junk status, saw its shares slide 3% to $11.05. Tyco is facing intense scrutiny for its accounting practices, and the selloff comes a day after the stock gained about 13%.

On the economic front, a survey from the Bank of Tokyo-Mitsubishi and UBS Warburg showed that U.S. retail sales rose 1.6% last week. The data are compiled by looking at seven major chains, including

Wal-Mart

(WMT) - Get Report

and

Sears

(S) - Get Report

.

Another report, the Redbook Retail Sales Average, rose 2.3% last week. The Redbook survey is based on a sample of general merchandise retailers. The Dow Jones U.S. Retail Index fell 0.9%.

U.S. Treasuries were higher around 4 p.m. EDT. The 10-year note was up 12/32 at 99 7/32, yielding 4.97%. Shorter-term notes and the long bond were also climbing.

European markets were higher. London's FTSE 100 rose 0.1% to 4935, while Germany's Xetra DAX gained 0.4% to 4606. In Asia, Japan's Nikkei 225 climbed 0.7% to 11,449, but Hong Kong's Hang Seng closed down 0.7% to 11,215.