Updated from 4:10 p.m. EDT

A revenue warning from Nortel Networks ( NT) and negative analyst comments on a slew of companies combined to send stocks lower for a second straight session Wednesday.

The Dow Jones Industrial Average finished down 130.32 points, or 1.5%, to 8694.09. The S&P 500 shed 16.95 points, or 1.8%, to 917.87, and the Nasdaq ended down 33.40, or 2.5%, to 1314.38.

Volume on the New York Stock Exchange reached 1.14 billion shares, while Nasdaq volume hit 1.3 billion. Breadth was negative, with decliners beating advancers by 2-to-1 on both the Big Board and Nasdaq.

Traders said investors have been taking money off the table recently following a five-week rally that lifted the Dow 16% and the S&P 18% from their intraday lows in late July. The Nasdaq jumped 11% over the last three weeks.

"We had a great three weeks but the market should not have rallied as rapidly or as much as it did," said Dave Briggs, head trader at Federated Investments. "A lot of it was exaggerated by hedge fund activity, and now I think we're just trying to get back to a level that is more in sync with what's unfolding in the economy."

Briggs added that investors are also cautious going into September. According to the Stock Traders Almanac, in the last half century the Dow and the S&P have seen their biggest percentage losses in September.

The one-year anniversary of Sept. 11 is also expected to dampen economic activity as airlines cut down their flights and consumers stay at home to watch news coverage. Briggs said it is possible to see a patriotic rally on the day just like the one seen on July 5, but with the preannouncement season also starting to heat up next month, the major averages could potentially move lower.

Inside the market, networking stocks shed 6% on average after Nortel warned that third-quarter revenue would come in below its previous estimates as a result of weak spending from U.S. phone companies. The telecom equipment maker also announced that it would cut another 7,000 jobs, or 16% of its staff, bringing its workforce to around 35,000.

In addition, Nortel plans to pare its cost structure to below $2.6 billion from $3.2 billion by cutting jobs and shutting down some of its facilities. Just last week, TheStreet.com reported that competitor Lucent ( LU) was planning to slash jobs by an additional 25% below targeted levels. Lucent shed 20 cents, or 11%, to $1.69, while Nortel was down 19 cents, or 15%, to $1.04.

Adding to the pessimistic mood were comments from Hewlett-Packard ( HPQ). The PC and computer hardware maker couldn't say when an upturn might lead business out of the doldrums, and it admitted that rival Dell ( DELL) had been stealing market share.

UBS Warburg cut its 2003 estimates on the stock, while Bear Stearns slashed its 2003 and 2004 earnings projections. H-P reported its earnings Tuesday night, and the company said it met analysts' 14-cent profit estimate for the latest quarter, the first period in which its results were calculated since the merger with Compaq. Shares of H-P ended up 0.4% to $14.27.

Sun Microsystems ( SUNW), on the other hand, fell 7% to $3.96 after Goldman Sachs said the Unix-systems maker is in danger of falling short of the consensus estimate for the September quarter. Sun is scheduled to hold a mid-quarter update Thursday.

Hardware issues slid 3% on average, while semiconductor stocks were down another 4% after falling almost 6% Tuesday. Prudential's Hans Mosesmann took down his estimates on Intel ( INTC) and AMD ( AMD) Wednesday.

"As for the market our biggest fear remains the Philadelphia Stock Exchange Semiconductor Index ," said David Skarica, publisher of the newsletter Addicted to Profits. "It is lagging on rallies and breaking down as we speak. As we have stated in the past the market cannot rally without the SOX."

In the financial group, stocks were pressured after Prudential Securities cut its 2002 and 2003 earnings estimates on Bear Stearns ( BSC), Lehman Brothers ( LEH), Merrill Lynch ( MER), Morgan Stanley ( MWD) and Goldman Sachs ( GS).

"Since the securities firms announced second-quarter earnings in mid-June, the industry has had to endure the WorldCom crisis, a softening global economy, and executive certification, along with the steep market selloff that likely resulted from these events," analyst David Trone wrote in a research note. "And oh, by the way, the fiscal third quarter covers the seasonally slower summer period."

Prudential's move comes a day after UBS Warburg cut its estimates for several big investment banks and discount broker Charles Schwab ( SCH).

Meanwhile, Citigroup's ( C) Salomon Smith Barney unit has admitted to allocating some 1 million shares to former WorldCom CEO Bernard Ebbers at a time when his company was purchasing millions of dollars in investment banking services from the firm.

The revelation came in documents released by a congressional committee that showed a number of top telecommunications executives got access to IPO shares in the late 1990s.

Separately, Worldcom's former Chief Financial Officer Scott Sullivan and former director of general accounting Buford Yates Jr. were indicted on charges of securities fraud Wednesday.

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