Updated from 4:03 p.m. EDT

Stocks fell sharply Tuesday, as strong earnings releases and economic data spurred speculation that the Fed could soon raise interest rates, impacting financial services and cyclical sectors.

Ahead of its much-anticipated first-quarter earnings release, Intel ( INTC) traded mostly flat, down just 7 cents to $27.67. The chip maker said after the bell Tuesday that it earned 28 cents a share in the quarter, before charges, on sales of $8.09 billion. Intel beat bottom-line expectations, but did not meet analysts' hopes for revenue. After hours, the shares were recently off 8 cents, or 0.3%

The Dow Jones Industrial Average lost 134.28 points, or 1.28%, to 10,381.28; the S&P 500 shed 15.78 points, or 1.38%, to 1129.42; and the Nasdaq was down 35.40 points, or 1.71%, to 2030.08. The losses came after all three indices started higher at the opening bell.

JP Morgan was the Dow's biggest percentage loser, off $1.52, or 3.7%, to $40.04, as the prospect of higher rates took down financial names.

Volume on the New York Stock Exchange was more than 1.4 billion shares, and decliners outnumbered advancers by about 8 to 1. More than 1.9 billion shares changed hands on the Nasdaq, where decliners dominated by about 7 to 2.

"Good economic news can sometimes be good for the market, and sometimes it's bad for the market," said David Sowerby, chief market analyst and portfolio manager at Loomis Sayles. "Today it happens to be bad, because there's a lot of speculation out there that the Fed is going to raise rates soon, the more we see numbers like this."

However, analysts continue to differ on when the Fed might take action. "We still think the Fed is more likely to wait until after the general election to raise rates," said Sam Stovall, senior investment strategist at Standard & Poor's. "But if we get several successive labor reports, retail sales reports and the like that indicate either an increase in economic activity or an increase in inflation concerns, then we might have to change our stance."

Stovall has been observing this month what he said is a "classic rotation" of cash during a period of interest rate risk out of discretionary consumer and industrial categories, such as homebuilding and financials, and into sectors like energy, health care and technology. "That is fairly consistent with history," he said.

The Amex Bank Index was down 2.2%, with components such as Mellon Financial ( MEL) and MBNA ( KRB) off more than 3%. The Nasdaq Computer Index was down merely 1.4%.

In other markets, the 10-year Treasury was down 29/32 in price with the yield up to 4.35%. The dollar was up against the Japanese yen and the euro; crude oil prices were lower after closing near a 13 1/2-year high Monday; and gold futures ended even on the day.

The Dow closed down about 0.7% for the year, while the S&P was up 1.5% and the Nasdaq was up 1.3% for 2004. Ken Tower, chief market strategist at CyberTrader, noted that all the major indices seemed to be unable to move ahead of their highs from early March.

"We are stuck in a trading range," said Tower. "The market's failure to move higher suggests that buyers aren't that motivated yet."

While Iraq news stayed mostly out of the spotlight on Wall Street for the day, market-watchers insist that uncertainty related to the U.S.-led occupation of the country, and its most recent setbacks, still pose a major barrier to investors' confidence.

"What we have brewing over there in Iraq is a situation where we were looking for things to grow increasingly stable, and instead they're growing uncertain," said John Hughes, equity strategist at Shields & Co. "Prolonging our stay there, which now looks inevitable, is what the market may be factoring in now."

In response to the recent outbreak of violence, President Bush will address the nation and take questions from reporters at 8:30 p.m. EDT in Washington -- the third prime-time television appearance of his presidency.

However, Hughes questioned whether there was anything he could say that would bolster investor confidence about the situation. "What can he say?" asked Hughes. "We're going to be there longer? We're going to send more troops? We have to stay the course? Is the market going to like that? Probably not, but the speech probably won't have a lot of impact on prices."

In Iraq, U.S. forces, backed by tanks and artillery, pushed to the outskirts of the Shiite holy city of Najaf on Tuesday for a showdown with a radical cleric. Meanwhile, a U.S. military helicopter was hit by ground fire and forced to land east of the city of Fallujah. Three crew members were wounded, and a Marine was killed during the rescue mission.

On the economic front, the government said retail sales jumped 1.8% in March, much more than the consensus forecast calling for a 0.7% gain. In February, retail sales rose 1%, revised up from the previously reported 0.7% gain. Excluding autos, sales rose 1.7% in March, which also handily beat forecasts. February's ex-auto figure was also revised up to an increase of 0.6%.

In earnings news, Merrill Lynch ( MER) almost doubled first-quarter profits and beat Wall Street's expectations. It reported earnings of $1.25 billion, or $1.22 a share, compared to the consensus estimate of $1.06 a share. Last year's profits totaled $643 million, or 67 cents a share. Its shares closed down $1.12, or 1.9%, to $58.61.

Johnson & Johnson ( JNJ) beat analysts' earnings expectations by 3 cents a share, as revenue rose more than 17% in the first quarter. The health care products giant had a profit of $2.49 billion, or 83 cents a share, vs. $2.07 billion, or 69 cents a share, a year ago. Revenue rose to $11.56 billion. Its shares closed up 19 cents, or 0.4%, to $51.39.

Pepsi Bottling ( PBG) also beat the consensus forecast, earning 19 cents a share, vs. 14 cents in the year-ago period. Its shares closed down 29 cents, or 1%, to $30.03.

Pitney Bowes ( PBI) said it would buy Group 1 Software ( GSOF) for $321 million to expand its line of document-management products. Pitney Bowes will pay $23 a share in cash for Group 1, whose shares shot up 37.5%.

In overseas trading, London's FTSE 100 closed up 0.6% to 4516 and Germany's Xetra DAX gained 1.4% to 4071. In Tokyo, the Nikkei closed at a new 32-month high with a 0.7% gain to 12,127. Elsewhere in Asia, Hong Kong's Hang Seng added 0.9% to 13,026.

Before Wednesday's opening bell, the first-quarter earnings onslaught continues. Among the notables due out in the morning: American Standard ( ASD) is expected to report earnings of $1.13 a share, up from last year's 87 cents a share; Bank of America ( BAC) is expected to post $1.80 a share, up from $1.59 a share; Delta Airlines ( DAL) is expected to lose $3.02 a share, up from last year's $3.49; Eaton ( ETN) should post a profit of 79 cents a share, up from last year's 53 cents a share; and Harley-Davidson ( HDI) is expected to earn 64 cents a share, up from 61 cents a share a year earlier.

Interest-rate concerns will be in the spotlight again, as the government is scheduled to release a reading on inflation in March at 8:30 a.m. EDT. The consumer price index is expected show a 0.3% jump for the month, matching February's gain. Also, the Commerce Department is expected to report that the U.S. trade deficit fell to $42.5 billion in February from $43.1 billion in January.