Updated from 4:04 p.m. EDT

Stocks closed with hefty losses Thursday following a series of lackluster economic reports and a sharp earnings decline from the world's biggest oil company. Unlike last week, the televised arrest of allegedly corrupt corporate executives failed to turn the market around.

The Dow Jones Industrial Average finished with a loss of 229.97 points, or 2.6%, at 8506.62. The Nasdaq dropped 48.26 points, or 3.6%, to 1280, and the S&P 500 fell 26.96 points, or 3%, to 884.66.

A week ago the arrest of Adelphia executives was credited with sparking a huge rally on Wall Street. But the same thing didn't happen Thursday despite the surrender of two WorldCom executives to authorities in New York. Former CFO Scott Sullivan and former controller David Myers are in custody and are facing securities fraud and other charges that could land them in prison for up to 65 years.

For the second straight day, weak economic reports weighed on the market. The Institute for Supply Management issued its latest report on manufacturing activity, the purchasing managers' index. The PMI fell to 50.5 in July from 56.2 in June, showing that growth in the sector has slowed, although a reading above 50 still signals expansion. The consensus estimate called for a reading of 55.0.

Separately, construction spending dropped 2.2% to $820.8 billion in June on an annualized basis, well below economists' forecasts.

The number of people seeking first-time jobless benefits rose by 20,000 last week, a bigger-than-expected jump. Coupled with Wednesday's weak GDP number and troublesome data in an index of Midwestern factory activity, investors might be justified in worrying about another slide into recession. Still, the four-week moving average of new jobless claims showed only a modest increase.

Decliners beat advancers roughly 3-2 on the New York Stock Exchange and the Nasdaq.

Technology bellwethers Cisco ( CSCO) and Intel ( INTC) were under pressure on the Nasdaq, falling 7% and 8%, respectively. Cisco was hurt by speculation that its chief financial officer might be close to resigning.

Citigroup ( C), Caterpillar ( CAT) and ExxonMobil ( XOM) were among the biggest losers on the Dow.

Citigroup was down on worries that the company's executives might have compelled analyst Jack Grubman to upgrade AT&T ( T) several months ago in a bid to win investment banking business from the company. Grubman is an analyst at Salomon Smith Barney, a unit of Citigroup.

Exxon, which posted quarterly results Thursday, said its profits fell 41% amid economic weakness and a stagnant travel market. The company saw its refining margins squeezed as demand for gasoline and heating oil shrunk, particularly among airlines in the aftermath of Sept. 11. Earnings have now fallen four straight quarters at Exxon. Shares fell 8.5% to $33.65.

Merrill Lynch lowered its investment rating on American Express ( AXP) to buy from strong buy on a valuation basis. Amex slipped 2.6%. In another valuation call, the brokerage upgraded semiconductor equipment maker Atmel ( ATML) to near-term buy from neutral, saying it believes the stock could trade above $5 in the intermediate term. Still, the stock shed 6% to $2.96.

Merrill also upgraded a number of electronic equipment makers, including Jabil Circuit ( JBL), Sanmina ( SANM) and Flextronics ( FLEX). Flextronics was up 1%, Sanmina's rose slightly, while Jabil was down 2%.

Elsewhere on the research front, telecommunications technology developer Qualcomm ( QCOM) lost 7% to $25.61 after Credit Suisse First Boston downgraded the stock.

AOL Time Warner ( AOL) was ordered to preserve documents from the Justice Department and the Securities and Exchange Commission as regulators investigate its accounting practices. The media giant is alleged to have artificially inflated advertising revenue from several of its partners. AOL's shares slipped 4% to $11.01.

Meanwhile, Williams Cos. ( WMB) said it has reached a preliminary agreement for $2 billion in secured financing from its lenders and Berkshire Hathaway ( BRK), according to The Wall Street Journal. The cash infusion will give the company time to search for a partner in its energy trading business as it attempts to combat a serious debt crisis. The stock gained 29% to $3.80.

Fellow energy company Dynegy ( DYN) was also on the move, trading up 15% to $2.75.

After the close Wednesday, publishing software company Adobe Systems ( ADBE) lowered its third-quarter outlook, citing lower-than-expected sales in Japan and Europe. The stock took a big hit, with its shares falling 30% to $16.83.

U.S. Treasury issues were higher around 4 p.m. EDT. The 10-year note was up 16/32 at 103 22/32, yielding 4.396%. The long bond was up 8/32 to 101 8/32 and yielding 5.290%.

Overseas markets were lower. In Europe, London's FTSE 100 lost 4.8% at 4045, while Germany's Xetra DAX was lower by 2.6% at 3606. Japan's Nikkei 225 fell 0.9% to 9794, and Hong Kong's Hang Seng closed down 0.9% to 10,180.

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