Updated from 4:10 p.m. EDT

The trading session was fairly quiet Tuesday until the Federal Open Market Committee entered the equation. The FOMC, the policymaking arm of the Federal Reserve unanimously decided to leave the fed funds target rate unchanged at 1.75%, a 40-year low. After some initial choppiness, stocks sold off sharply, and by the end of the day, the major averages were near their session lows.

The Dow Jones Industrial Average finished with a loss of 206.43 points, or 2.4%, to 8482.46. The Nasdaq dropped 37.52 points, or 2.9%, to 1269.32, and the S&P 500 fell 19.58 points, or 2.2%, to 884.22.

Prior to the announcement, the Dow stood at 8682, down 7 points, while the Nasdaq was up 5 at 1311.

Most economists expected no change in rates. However, the FOMC also said that increasing weakness in the economy is a greater possibility than it was at the group's last meeting. Previously, the U.S. central bank held a neutral bias, meaning it thought the risks of a weak economy were equal to the risks of inflation. The change sets up the possibility of an intermeeting rate cut.

Treasuries were higher following the meeting. Around 4 p.m. EDT, the 10-year note was up 1 3/32 at 102 13/32, yielding 4.080%. The long bond was up 1 16/32 to 106 3/32 and yielding 4.973%. The yield on the 30-year is now at a nine-month low.

One of the top corporate stories again involved an airline, this time American Airlines, the world's biggest carrier. The company set plans to cut 7,000 jobs, or about 6% of its staff, by March 2003, retire aircraft and reduce capacity. The company, a subsidiary of AMR ( AMR), also said it will defer some aircraft deliveries. AMR's shares tacked on 5% to close at $8.74.

The announcement comes in the wake of a bankruptcy filing at US Air ( U), the nation's seventh-largest carrier.

Elsewhere, Martha Stewart's broker reportedly claims Stewart was the recipient of information about insider selling in shares of ImClone ( IMCL). Peter Bacanovic said his assistant passed the information to Stewart and later wrongly claimed to have done it at Bacanovic's behest.

Neither Bacanovic nor Stewart has been charged in the investigation, and lawyers for all three declined to comment on the report, published in London's Financial Times.

The retail sector was active, as several big chains reported their earnings and the government released retail sales figures for July.

Atop the earnings docket was Wal-Mart ( WMT), which posted a 26% rise in second-quarter profits thanks to an increase in sales. Shares of Wal-Mart rose 0.6% to $48.71. Also in the retail sector, men's apparel maker Cutter & Buck ( CBUK) was hammered after the company discovered accounting irregularities that will require two years of restatements. The stock lost 14% to $3.44.

Meanwhile, department store operator J.C. Penney ( JCP) fell 4% to $16.15 after posting a second-quarter loss, and TJX ( TJX), the owner of T.J. Maxx and Marshalls, climbed 4% to $18.75 after beating earnings estimates by a penny.

The Commerce Department said July retail sales rose 1.2%, matching economists' forecasts, and up slightly from June levels. Excluding automobile sales, the data revealed a 0.2% increase, relatively in line with expectations.

The retail sector was stronger for much of the day, but after the late-day dive, the Dow Jones U.S. Retail Index finished lower by 0.2%.

Amusement park operator Six Flags ( PKS) was the biggest loser on the New York Stock Exchange , plunging 57% to $5.06 after posting a massive second-quarter loss. Subsequently, several brokerages lowered their investment rating on the stock.

Drugmaker Andrx ( ADRX) was one of the Nasdaq's big losers, tumbling 12% to $20.54 after the company said an employee might have altered its accounting records. Andrx is seeking a five-day extension for filing its financials with the Securities and Exchange Commission.

Another stock under pressure was Kulicke & Soffa ( KLIC). The semiconductor-equipment maker saw its shares drop 22% to $4.08 after warning that fourth-quarter revenue would fall short of analysts' expectations due to a continued slowdown in demand for electronics products.

In Europe, London's FTSE 100 gained 1.2% to 4272, and Germany's Xetra DAX was up 1% to 3683. Japan's Nikkei 225 fell 0.6% to 9689, and Hong Kong's Hang Seng closed up 1.4% to 10,100.