A new report out Friday shored up claims that the semiconductor industry clings to a frail recovery. But that probably won't give investors much comfort, because the outlook for the rest of the year is still getting uglier. In the June quarter, sales of semiconductors climbed about 6% from the prior quarter, according to a new report from the Semiconductor Industry Association, an industry trade group. But a market fixated on worst-case scenarios focused instead on signs of trouble going forward. Late Thursday, National Semiconductor ( NSM) acknowledged its August-quarter sales would be flat with the May quarter, down from an earlier forecast of 6% to 8% sequential growth. It chalked up much of the shortfall to weaker-than-expected PC sales. The next morning, on Friday, an analyst at Morgan Stanley warned that even forecasts for flat semiconductor growth this year may be too optimistic. Investors responded by pummeling chip stocks. The Philadelphia Stock Exchange Semiconductor Index closed down 3.4% to 301, after dipping below the 300 threshold in intraday trading -- a level it hasn't visited since November 1998. As recently as March 8, the index reached a year-to-date high of 638. Among the leading losers in chipland, Intel ( INTC) surrendered 85 cents, or 4.8%, to close at $16.71, and Nvidia ( NVDA) capped off a bruising week by losing 66 cents, or 6.6%, to $9.35. National Semi was down 25 cents, or 1.5%, to $16.88.