Updated from 2:15 p.m. EDT

War is good for absolutely nothing (say it again), and the heightened prospect of war with Iraq proved unkind for those long stocks on Monday.

An already sagging equity market took a sharply lower turn at around 11:30 a.m. EST on word the Iraqi parliament said many elements of Friday's United Nations resolution could not be met. An early afternoon recovery attempt failed miserably in the final 90 minutes of the session as major averages ended near their worse levels of the day.

The

Dow Jones Industrial Average

fell 2.1% to 8358.95, the

S&P 500

lost 2.1% to 876.18, and the

Nasdaq Composite

fell 3% to 1379.10. Monday's geopolitical developments helped crude futures rise 0.6% to $25.94 while the Dollar Index recovered from last week's shellacking, rising 0.19 to 104.69.

Technically speaking, traders said the Dow's inability to hold perceived support at 8400 was significant and with the bond market closed in observance of Veterans Day, a quasi-holiday atmosphere prevailed. Trading volume was noticeably light with just 1.1 billion shares exchanged on the Big Board, the lowest level since Sept. 16, and 1.1 billion in Nasdaq trading, the lightest since Oct. 14.

Still, the market's tone was decidedly negative, with declining stocks leading advancers by better than 2 to 1 in both

Big Board

trading and in over-the-counter activity.

Over the summer, when the Bush administration began to make clear its intentions regarding Iraq, some on Wall Street longingly recalled the market's historic rally shortly after the Gulf War began in 1990. Expectations for a repeat performance were responsible, some said, for the market's rally in August.

More recently, however, market participants have come to realize that it's not 1990 for any number of reasons. Psychologically, the Sept. 11 attacks have created a sense of vulnerability on the home front -- particularly in lower Manhattan -- that was not evident when the first Bush administration took on Saddam Hussein. Fundamentally, an era of balanced federal budgets, the explosion of personal computing, the Internet, and wireless communications was yet to come in 1990, as one reader observed, while today we are dealing with the excesses of that "New Economy" era.

Still, don't be surprised if the market rallies shortly after the presumptive next war with Iraq begins -- assuming it goes well militarily. Depending on the timing, the outbreak of hostilities could provide a ready-made excuse for buyers, especially if the current backslide continues for a little while longer.

Notably, sectors that led the rally from the Oct. 9 lows were among those hardest hit in Monday's setback. The Philadelphia Stock Exchange Semiconductor Index fell 5.6%, the Nasdaq Telecom Index lost 4.3% and the Philadelphia Stock Exchange/KBW Bank Index shed 1.3%. The S&P Retail Index fell 2.1% after several retailers reaffirmed already downbeat guidance for November.

The biggest drags on the Dow included defense industry and economically sensitive names such as

United Technologies

,

Boeing

(BA) - Get Report

,

3M

(MMM) - Get Report

and

Caterpillar

(CAT) - Get Report

.

Individual names weighing on stock proxies included

General Electric

(GE) - Get Report

, which fell 3.8% amid ongoing fallout from a critical report by J.P. Morgan on Friday;

Hewlett-Packard

(HPQ) - Get Report

, which dropped 11.2% on word President Michael Capellas is leaving the company;

Duke Energy

(DUK) - Get Report

, down 7.5% after receiving a subpoena from the U.S. attorney's office regarding its activities in California;

Tenet Healthcare

(THC) - Get Report

, which lost another 6.4% amid ongoing revelations about its inflated Medicare revenues; and

Oracle

(ORCL) - Get Report

, which lost 5.2% following a downgrade from Deutsche Bank Securities.

The Great Debate

A comment

here Friday about how the Republican sweep and larger-than-expected rate cut should cause hardcore bears to at least reconsider their Depression-era/deflationary spiral economic scenarios drew a predictably strong response.

One reader, who has long warned about the deflationary threat, referred me to some comments Friday by

RealMoneyPro.com's

Doug Kass, who noted the following "deflationary facts":

Since the economy peaked in 2000, inflation in goods and services has fallen from a nearly 2.5% yearly rate to a 50-year low of 0.8%.

For goods only, the price change has gone from plus 0.8% at 2000's peak to "outright deflation" of negative 0.8%, currently.

For services only, average price appreciation has dropped from 3% in 2000 to 1.8% currently.

All those figures are well below historic norms for a post-peak cycle, observed Kass, before he quoted the following from Morgan Stanley chief economist Stephen Roach: "An extraordinary deflationary shock in tradable goods has coincided with outsize disinflation in services, resulting in the most deflation-prone business cycle of the modern post-World War II era."

On the other hand, James Padinha, economic strategist at Arnhold & S. Bleichroeder, made the following observations last week in the wake of the

Federal Reserve's

rate cut:

Where goods prices were falling at an 8.7% annual rate during the fourth quarter of 2001, they're currently rising at a 1.6% annual rate.

The Economic Cycle Research Institute's Future Inflation Gauge has gone from falling at a 16% rate in December 2001 to rising at an 18% rate now.

The prices index in the Institute for Supply Management's service sector index has gone from falling at a 33% rate during the fourth quarter of 2001 to rising at a 30% rate now.

Also buttressing the "no-deflation" camp is the recent weakness in the dollar -- and fiscal/monetary policies apparently designed to facilitate more -- as well as yearlong strength in gold prices and many other industrial and agricultural commodities. Furthermore, while there is clearly deflation in tech/telecom and autos, something completely the opposite is occurring in real estate and health care.

The inflation vs. deflation debate shows no signs of abating, perhaps because there is no clear-cut winner and plenty of fodder for both camps.

"We continue to monitor the inflation/deflation battle in the financial markets with great interest," Martin Pring wrote in the November issue of

InterMarket Review

. "The sharp sell-off in bonds

in October pulled this indicator back from a deflationary brink. But by the same token, there have been no notable changes on the inflationary side that would allow us to come to an inflationary conclusion."

Monday afternoon, Pring said it was still too early to make a firm determination over whether inflationary or deflationary pressures will dominate the next cycle. However, he agreed the events of the past week -- the Republican sweep, Fed half-point cut, and increased likelihood of war -- have indicators "moving more in the

inflation direction."

Among the inputs the veteran technician said would signal the inflationary worm has turned (up) would be a gold close above $328 per ounce and/or a silver close above $4.70. On Monday, gold slid fractionally to $321.60 while silver rose 0.9% to $4.57.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.