Updated from 8:45 a.m. EDT

Increasingly, the U.S. stock market is starting to resemble Mike Tyson in his recent title fight with Lennox Lewis: Unable to stop the blows, resigned to the beating. After suffering some damage in the late rounds

Tuesday, the market absorbed two haymakers after the bell.

First,

Micron Technology

(MU) - Get Report

posted an

unexpected second-quarter loss amid softening DRAM prices. Second, and more ominously, an internal review at

WorldCom

(WCOM)

revealed a

massive fraud in which the company systematically treated ordinary expenses as capital expenditures. The accounting improprieties artificially inflated the firm's cash flow by $3.8 billion in the past five quarters.

Whether the one-two punch of Micron and WorldCom delivers the

much-discussed capitulation session (or knockout, to extend the boxing metaphor) remains, of course, to be determined. Still, equities were getting trounced in the early going.

Shortly after the bell, the

Nasdaq

was down 37 points, or 2.6%, to 1387 -- right around its intraday Sept. 21 low. The

Dow

, after initially toying with a 200-point loss, was hovering around 8987, down 140 points or 1.5%. The

S&P 500

was losing 18 points, or 1.8%, to 958.

Overnight, Japan's Nikkei 225 fell more than 4%, while major European bourses were down between 3% and 4%. Spreads on telecom-related debt widened notably in Europe, with WorldCom's 1.25 billion euros of 6.75% bonds that mature in May 2008 plummeting to 12% of face value,

Bloomberg

reported.

Meanwhile, the dollar tumbled to its lowest level vs. the euro since early February 2000, while gold and U.S. Treasuries rallied sharply in a "flight to safety" trade.

At first glance, the Micron miss might be considered more damaging than WorldCom's revelations. As recently as Monday there was speculation about an upturn in the chip industry and positive comments from SG Cowen about valuation of some names in the sector. Micron had a market cap of $11.9 billion as of Tuesday's close vs. $2.5 billion for WorldCom, whose shares had already plummeted 94% in the past 12 months. Few investors held out much hope for a recovery at WorldCom and there was widespread talk of the firm being delisted from Nasdaq and a likely bankruptcy filing -- even before Tuesday night's revelations. In after-hours trading Tuesday, WorldCom shares traded as low as 20 cents vs. $14.08 at the beginning of 2002 and $64.50 at their peak in June 1999. The stock was halted Wednesday morning at 9 cents.

Still, WorldCom's implosion could have far-reaching implications, beginning with the 17,000 employees the firm said will be laid off beginning Friday. The firm has already fired CFO Scott Sullivan, while David Myers, senior vice president and controller, threw in the towel and resigned.

From a financial standpoint, WorldCom's announcement that it will restate earnings for 2001 and the first quarter of 2002 could accelerate the company's push toward bankruptcy: WorldCom has over $30 billion of outstanding debt and may no longer be able to secure financing to service those loans in the wake of the latest damage to its already tarnished reputation. (In March, the

SEC

announced it was investigating WorldCom's accounting practices, which was followed by an earnings warning and a subsequent credit rating downgrade to junk status in mid-April. On April 30, CEO Bernie Ebbers resigned amid questions about the more than $300 million in personal loans he'd been granted by the company.)

This latest development will pinch WorldCom financial backers and shareholders, an already beleaguered group. As of March 31, WorldCom's largest institutional shareholder was France's

AXA Financial

, which owned about 7% of the firm's outstanding shares. AXA shares fell 6.9% in Paris after the company estimated its gross exposure to WorldCom at a face value of euro 40 million. Other European firms revealed their exposures and U.S.-based financial firms will likely make similar announcements in the coming days, much as occurred as

Enron

unraveled last fall.

Related Stories

WorldCom Tilts Toward Abyss

Seymour: Where Will the WorldCom Damage End?

Cramer: WorldCom Bondholders Are Sunk Too

Greenberg: WorldCom Won't Be the Final Scandal

Task: For Markets, Bad News Getting Worse

Willard: WorldCom: Don't Call It a Crisis, Just a Collapse

Along with telecom equipment maker

Alcatel

and other WorldCom competitors and suppliers, financial and insurance firms such as

ABN Amro

were notably weak in European trading. U.S.-based firms exposed to WorldCom could face similar repercussions today. Among WorldCom's top shareholders were Wall Street giants

Citigroup

(C) - Get Report

,

J.P. Morgan Chase

(JPM) - Get Report

and

Morgan Stanley

(MWD)

. The Vanguard Group was the firm's largest mutual fund holder, with 1.74% of outstanding shares as of March 31.

Beyond the financial damage caused by WorldCom's revelations is the psychological effect. In the wake of Enron's accounting scandal and myriad other cases of corporate malfeasance, investor confidence in Corporate America is already deeply damaged. Adding irony to insult, Arthur Andersen was WorldCom's auditor until May 14, when it was replaced by KPMG, while J.P. Morgan Chase was one of the firms financiers. Like Arthur Andersen, which audited other high profile accounting blow-ups such as

Waste Management

(WMI)

and

Sunbeam

(SOCNQ)

, J.P. Morgan Chase was intricately involved with a number of companies with accounting or other scandals, including Enron,

Xerox

,

Kmart

(KM)

and

Global Crossing

.

One source surmised that investors may now rightly question whether capital expenditure increases in recent quarters by other firms were "real or fraudulent." The greatest irony of all this is that the

Federal Reserve

has cited business spending as key to the economy's recovery. The Fed's rate-setting body ends its two-day policy meeting today. No rate cut is expected, but the Fed has other means at its disposal -- including, but not limited to, the policy statement -- to possibly quell unrest in financial markets.

At this juncture, it looks like they may need to do

something

.