Updated from 4:04 p.m. EDT

Stocks fell Monday as continued strong economic news and solid earnings translated into concerns about inflation and the inevitable raising of interest rates. Growing instability in the Middle East also weighed on investors.

The Nasdaq led declines, falling 13 points, or 0.63%, to 2036.77; the Dow Jones Industrial Average closed down 28.11 points, or 0.27%, to 10,444.73; and the S&P 500 shed 5.12 points, or 0.45%, to 1135.48. The 10-year Treasury note traded up 4/32 to yield 4.44%, while the dollar was lower against the euro and the yen.

Volume was relatively light; the New York Stock Exchange approached 1.3 billion shares, and decliners outnumbered advancers by about 2 to 1. On the Nasdaq, more than 1.7 billion shares changed hands, and decliners outpaced decliners by about 3 to 2.

Despite strong fundamentals in the economy, geopolitical worries have coupled with concerns about higher interest rates and a strengthening dollar to create what Peter Cardillo, chief market analyst at S.W. Bach & Co., called a "fear factor."

"What we're seeing here is not so much an increase of the fear factor, but a result of the fear factor making itself known in the marketplace," Cardillo said. "The economy is doing well and earnings are great, but reports about the war in Iraq from over the weekend, rising oil prices and other factors seem to have put a cap on the market for the time being."

In Iraq, two American soldiers were killed, and five more wounded, in a large explosion while searching a chemicals warehouse in Baghdad. Meanwhile, one soldier was killed, and eight more wounded, as U.S. forces continued to engage in firefights with insurgents in the besieged town of Falluja.

On the economic front, the Commerce Department reported that new-home sales shot up to 1.228 million in March, from an upwardly revised 1.163 million in February. Economists were expecting 1.173 million sales. The housing report continues a string of better-than-expected economic data that is adding to speculation that the Federal Reserve will be forced to raise interest rates before the presidential election in November.

Barry Ritholtz, chief market strategist at Maxim Group, has been explaining to clients why the strong economic news is not a good reason to get aggressively bullish on stocks. "If you wait for really good news to put your money into the market, you kind of miss the boat," he said. "You have to sometimes hold your nose and buy when you're not comfortable.

"The real concern is that housing numbers this strong show that ultra-low interest rates are having a direct impact on the economy, and if we move from ultra-low to just low, what is that going to pull out of the economy?" Ritholtz added. "On the one hand you have fabulous profits, but the profits are caused by a fabulous stimulus, and the fabulous stimulus now looks to be going away."

Investors looked for safety in biotech names, as the Amex Biotech Index closed up 2.4%. The Philadelphia Semiconductor Index led the Nasdaq's decline, falling 2.7%.

Boeing ( BA) led the Dow's advancers after it announced the first order for its 7E7 Dreamliner came in from All Nippon Airways, worth $6 billion at list prices. Its shares closed up 79 cents, or 1.9%, at $43.24.

Meanwhile, Wal-Mart ( WMT) led the index's 15 decliners. Its shares lost 83 cents, or 1.4%, to $58.14 after the retailer reported that April same-store sales were tracking near the low end of its 4% to 6% target growth range.

Shares of OSI Pharmaceuticals ( OSIP) skyrocketed $52.96, or 138.9%, to $91.10, following positive news on Tarceva, its experimental drug that treats lung cancer, from a late-stage clinical trial. OSI partnered on the drug with Switzerland's Roche Holdings and Genentech ( DNA), whose stock was up $13.77, or 11.6%, to $131.99.

Among the latest crop of big earnings reports was Entergy ( ETR), which said first-quarter earnings fell to $207 million, or 88 cents a share, from $395 million, or $1.73 a share, last year. The latest quarter's number still beat estimates by 1 cent a share, and the company guided its full year in line. Its shares closed down 10 cents, or 0.2%, to $56.24.

Auto-interior giant Lear ( LEA) earned $91.4 million, or $1.30 a share, in the first quarter of 2004, up from $67.9 million, or $1.01 a share, last year. The latest quarter's profit beat estimates by 13 cents a share, and the company said it guided in a range that encompasses analysts' second-quarter estimates. Its shares closed down $1.54, or 2.4%, to $62.46.

Urban Outfitters ( URBN) said first-quarter same-store sales growth will probably come in higher than last year's 21%, and predicted earnings will more than double from last year's 16 cents a share. That would take first-quarter profit at least 7 cents a share above existing estimates of 25 cents a share. Its shares gained $1.38, or 2.9%, to $49.55.

Overseas markets were mixed. London's FTSE 100 closed up a fraction at 4572 and Germany's Xetra DAX up 0.5% to 4126. In Asia, Japan's Nikkei rose 0.4% to 12,164, while Hong Kong's Hang Seng tumbled 2% to 12,133.

Earnings season continues before Tuesday's opening bell, with first-quarter results scheduled to be released by more than 50 companies. Among the notables, announcements are due out from Lockheed Martin ( LMT), expected to say that earnings fell to 53 cents a share; DuPont ( DD), expected to report earnings of 95 cents a share, up from last year's 61 cents a share; Verizon ( VZ), expected to report earnings of 57 cents a share, down from last year's 68 cents a share; and U.S. Steel ( UAG), expected to say it earned 46 cents a share, up from last year's 41 cents a share.

At 10 a.m. EDT, the National Association of Realtors is expected to report that existing home sales totaled 1.2 million in March, up from the 6.12 million recorded in February. Also, economists expect the Conference Board will say that its consumer confidence index remains unchanged in April at 88.3.