Updated from 1:47 p.m. EST

Concerns that a liquidity squeeze is spreading among telecommunications companies sent issues in that sector lower Thursday.

The selling was linked most explicitly to liquidity and accounting concerns at Qwest ( Q) but was also fueled by rumors that at least one other firm could face a cash crunch.

"There are concerns about anyone else who is financing with commercial paper," said Rob Arancio, head of Nasdaq trading at Lehman Brothers.

After the closing bell, Qwest said it would fully draw down $4 billion in backup credit to resolve short-term liquidity needs in the commercial paper market. The telecom company said it would use the proceeds to pay down all of its $3.2 billion of commercial paper debt and use the remaining $800 million for flexibility in the capital markets.

Earlier Thursday, reports circulated that the company had drawn down $1 billion in bank credit, prompting a selloff in Qwest's stock. It closed down $1.10, or 12.8%, to $7.49.

"The commercial paper market is very unsettled right now, and we're seeing companies start to lose some access to it," said Greg Zappin, an analyst at Standard & Poor's. On Thursday afternoon, S&P cuts its credit rating on Qwest, citing "near-term liquidity concerns."

Other companies in the sector were also hit hard, as speculation built that liquidity problems could spread. "There is a rumor that Sprint ( FON) is going to be the next company to have to go off commercial paper, which is also keeping the group down," said Peter Blatchford, an equity trader at Miller Tabak.

Sprint firmly denied the buzz. "This is a misguided rumor," said Mark Bonavia, a spokesman at Sprint. "We have zero issues related to our liquidity or our commercial paper."

Nevertheless, Sprint closed the session down 89 cents, or 6.1%, to $13.80, while Sprint PCS ( PCS) ended off $1.42, or 12%, to $10.20. Nextel ( NXTL), which recently gave a rosy subscriber growth outlook, finished behind by 17 cents, or 3.4%, to $4.85.

In the wake of the Enron debacle, any company with even a hint of trouble next to its name is at risk of getting knocked out of the commercial paper market, debt analysts said. Earlier this week, Qwest received a subpoena for documents concerning Global Crossing from the Securities and Exchange Commission, in connection with an investigation of the bankrupt undersea network company.

Telecom companies have commonly turned to cheaper short-term funding in the form of commercial paper to finance capital spending projects. But that has declined markedly in the last 12 months. Lately, firms have been using the proceeds of long-term issuances to pay down commercial paper debt.

Companies should try to limit distance themselves from this type of exposure, analysts said. "Among investors, there's little risk tolerance for the short-term debt these days," said John Atkins, an analyst at IDEAglobal.com, an independent research firm.

In the past few days, the accounting brouhaha that roiled markets last week seemed to have settled down a bit. " But after Enron, there is much more scrutiny of credit risk, which is not to say Qwest is going to get a junk rating or default," Atkins said. "It's just that right now, the mood is not good."