Updated from 4:05 p.m. EST

The

Fed

made a subtle change in language and the market changed direction in a dramatic way.

Stocks closed sharply lower after the Federal Reserve altered its monetary policy statement by dropping the now-famous promise to keep interest rates low for a "considerable period," as traders anticipated a gradual shift toward a tightening mode..

The

Dow

lost 141.55 points, or 1.3%, to 10,468.37 and the

S&P 500

dropped 15.57 points, or 1.4%, to 1128.48, their biggest single-day point losses since September 24 . The

Nasdaq

plunged 38.67 points, or 1.8%, to 2077.37, its worst decline since December 9.

Volume on the New York Stock Exchange was 1.84 billion shares, while 2.29 billion shares changed hands on the Nasdaq. Decliners walloped advancers by about 7 to 3 on the NYSE and by about 7 to 2 on the Nasdaq.

Fed Sends Shockwaves

The Fed left its key policy rate unchanged at 1%, but did remove the language, "The committee believes that policy accommodation can be maintained for a considerable period." This statement has been debated heavily in the financial community, with many believing its removal would signify a shift toward a less accommodative policy. The FOMC replaced the statement with, "The committee believes that it can be patient in removing its policy accommodation."

"From our standpoint, the change in language represents a small step toward an eventual rate hike," said David Greenlaw, U.S. economist at Morgan Stanley. "We continue to look for a tightening move in September, assuming that labor market conditions soon begin to show noticeable improvement."

The stock, bond and currency markets all reacted sharply to the Fed's statement.

Stocks dropped like bricks after the decision. At about 2 p.m. EST, the Dow was up about 29 points, the S&P 500 was up 4 points and the Nasdaq was up 3 points. Shortly after the decision at 2:15 p.m. EST, the Dow was down over 100 points, the S&P 500 was off over 10 points and the Nasdaq had fallen over 20 points. The major averages moved even lower as the day progressed.

"There was a little confusion over the removal of the language 'considerable period,' but the knee-jerk reaction was that higher rates are imminent," said Peter Blatchford, a trader at Miller Tabak. He believes it is a bit of an overreaction.

Bonds also felt the pressure; the 10-year U.S. Treasury note had posted modest gains earlier in the day, but was stung with more than a 1-point decline following the announcement, bringing the yield over 4.25%. On the day, the 10-year Treasury note fell 23/32, yielding 4.17%.

The dollar was slightly stronger after the news, as currency traders bet higher yields on U.S. assets would attract more foreign investment. On the day, the dollar was weaker vs. both the euro and the Japanese yen. One euro was recently worth about $1.249, while the dollar was worth 106.03 yen.

"The FOMC's rewording is dollar positive as it suggests that the U.S. dollar yield disadvantage relative to higher yielding currencies could begin to erode earlier than what the previous statements suggested," said Ashraf Laidi, chief currency analyst at M.G. Financial.

Overseas markets finished mixed. Germany's Xetra DAX gained 0.4% at 4150, and London's FTSE 100 improved 0.5% at 4468. In Asia, Hong Kong's Hang Seng fell 2.4% to 13,432, and Japan's Nikkei lost 0.7% to 10,852.

In other economic news, durable goods orders were unchanged in December. Although this report was an improvement from November's revised drop of 2.3%, it was far lower than the consensus estimate of a 2% rise.

New-home sales fell to an annualized 1.06 million units in December, less than what economists had expected and in contrast to a surge in existing-home sales during the month.

Movers

Procter & Gamble's

(PG) - Get Report

earnings contributed to this morning's positive sentiment. The company had a profit of $1.30 a share in its second quarter on a 20% surge in revenue. Earnings were expected to be $1.28 a share, according to Thomson First Call. Looking to the third quarter, the company said the "current consensus estimate is at the top end of net earnings-per-share expectations." The Wall Street consensus is $1.06 a share. The company's stock fell 56 cents, or 0.6%, to $98.62.

Time Warner

(TWX)

said it earned 24 cents a share in its fourth quarter, excluding items, ahead of analysts' estimates for 15 cents a share. Revenue was up 6.4%. The stock lost 85 cents, or 4.5%, to $17.96.

Altria Group

(MO) - Get Report

reported a quarterly profit of $1.06 and a 10.2% rise in revenue, in line with expectations. The company, formerly known as Philip Morris, earned 93 cents last year. The stock added 50 cents, or 0.9%, to $55.50.

After Tuesday's close,

Amazon.com

(AMZN) - Get Report

met analysts' expectations with a profit of 29 cents in the fourth quarter, a 10-cent improvement over last year. The company reported a 36.2% surge in revenue, but investors were concerned that it was driven by overly aggressive discounting to garner market share. The stock fell $3.78, or 6.8%, to $51.96.

Anadigics

(ANAD)

posted a loss of 37 cents a share in its fourth quarter, worse than the consensus expectations for a loss of 35 cents a share. Revenue jumped 25%. The shares lost 76 cents, or 9.7%, to $7.08.

In research, Bear Stearns downgraded shares of

Caterpillar

(CAT) - Get Report

, while

Network Associates

(NET) - Get Report

was upgraded at both Bank of America and Credit Suisse First Boston. Caterpillar shares slipped $2.38, or 2.9%, to $79.62, while Network Associates gained $1.66, or 10.3%, to $17.77.

Looking ahead, the market is likely to refocus on fourth-quarter earnings reports Thursday. Highlights include:

Boeing

(BA) - Get Report

,

Exxon Mobil

(XOM) - Get Report

,

Honeywell

(HON) - Get Report

,

Jetblue Airways

(JBLU) - Get Report

,

Sears, Roebuck

(S) - Get Report

and

Gateway

(GTW)

.

In economic news, look for further readings on the tepid U.S. labor market. The government will release its employment cost index for the fourth quarter and the Conference Board is due to release its help-wanted index for December. In addition, initial jobless claims for the week ended Jan. 24 are expected to fall slightly to 340,000, making it 17 straight weeks under the key 400,000 level thought necessary for labor market improvement.