Updated from 4:06 p.m. EDT

Tech stocks led the markets lower Wednesday as oil prices spiked late in a see-saw session that ultimately couldn't shake weak margin guidance from Intel ( INTC) and a larger-than-expected drop in retail sales.

The Dow Jones Industrial Average closed down 38.79 points, or 0.38%, to 10,208.80; the S&P 500 shed 3.67 points, or 0.33%, to 1111.47; and Nasdaq Composite dropped to its lowest close since late May, down 16.78 points, or 0.87%, to 1914.88. The 10-year Treasury bond was trading down 2/32 in price to yield 4.48%, while the dollar was higher against the yen and lower against the euro.

Volume picked up during the selloff, approaching 1.5 billion shares on the New York Stock Exchange, where decliners held a small majority, and reaching nearly 2.1 billion shares on the Nasdaq, where decliners almost doubled advancers.

Oil prices soared above $41-a-barrel level after the International Energy Agency estimated that oil demand this year has grown by 2.3 million barrels a day, or 2.9%, to 81.1 million, the steepest annual increase since 1980. Meanwhile, the world's margin of spare production capacity has likely fallen below 2% of demand for the first time since the oil crises of the 1970s, leaving the global oil supply system particularly vulnerable to disruptions and price spikes.

The benchmark U.S. crude added $1.61, or 4%, to $41.15, its highest close in six weeks and about a dollar shy of its record high touched in early June.

"The bargain hunters seem to be taking the rest of the day off," said Tom Schrader, a trader with Legg Mason, in the midst of afternoon trading. "Oil going back above the $40 mark is definitely a negative for the market and that could have a lot to do with it."

All three indices are now in negative territory for the year. The Nasdaq now sits near its May low while the other major averages are approaching theirs, a technical support level that, if broken, could signal further downside. "The recent market action has been negative and there is a good possibility that the bottom of the six-month base will be taken out," said Mark Arbeter, chief technical analyst with Standard & Poors.

At the open, the Nasdaq tumbled more than 0.8% as investors digested the news from Intel. Despite saying second-quarter earnings nearly doubled to $1.8 billion, or 27 cents a share, on an 18% jump in revenue, the problem was guidance that shaved 2 percentage points from the chipmaker's gross-margin estimate.

The development reflects rising inventory of microprocessors as Intel overestimated near-term demand from computer resellers. Still, executives said overall demand remains generally robust throughout its markets, and forecast a third-quarter revenue range with a midpoint of $8.9 billion, higher than Wall Street's $8.76 billion consensus.

Intel closed off $2.76, or 10.6%, to $23.38. Among other stocks feeling the Intel heat, Dell ( DELL) closed down 56 cents, or 1.6%, to $34.84, and Advanced Micro Devices ( AMD) fell 76 cents, or 5.2%, to $13.74.

Meanwhile, the government said retail sales took their biggest tumble in more than a year last month, falling 1.1% compared with Wall Street's consensus estimate for a 0.7% drop. Excluding autos, sales were down 0.2%, compared with expectations for a 0.2% gain. May's ex-auto number was revised up to a 0.9% increase, better than the 0.7% reported previously.

Also, the U.S. import price index was down 0.2% in June, according to the Labor Department, while the export price index dropped 0.6%. The decline in export prices was the first since last July and the largest drop since October 2001.

The news from Intel and retailers exacerbated recent concerns about the sustainability of a seemingly vigorous economic recovery and the future of tech spending. A wave of earnings warnings from the software industry in early July prompted several analysts to predict a slowdown in the sector, sending the Philadelphia Semiconductor Index to its lowest levels of the year and sparking a recent selloff in the broader markets .

"The market in technology hit a wall in January, and the broader market hit a wall in March," said Dave Briggs, head of equity trading with Federated. "If the market's any type of accurate discounting mechanism, the implication of that is that the economy is going to start to slow and earnings are going to start to slow. Oddly enough, that's what we're starting to see here in July.

"Things are still OK," he added, "but people got religion in the big bear market of the early part of the decade, and they're not willing to step up to the plate and pay 20, 30 or 35 times earnings anymore. The slowing of the economy, combined with the neck-and-neck presidential election and some of the geopolitical turmoil, it has a lot of people waiting to see what October's earnings look like."

Most market-watchers agree that a cloud of pessimism has alighted over Wall Street, which seems in direct contrast with the latest Investors Intelligence survey. The latest survey results out Wednesday morning said 52.2% of respondents were bullish while 18.8% were bearish. Two weeks ago, bulls reached 56.1%, their highest reading since February, while bears were down to their lowest level since February at 17.4%.

Michael Burke, editor-in-chief of Investors Intelligence, said investors are frustrated with the market's lack of progress in the face of the bullish fundamentals that have dominated corporate and economic readings of late.

"I think people are starting to get more nervous here, but nobody wants to really be bearish, because that's something that hasn't been a good idea since March of last year," said Burke.

In Iraq, a suicide attacker set off a car bomb at a checkpoint near the British Embassy and the interim Iraqi government's headquarters in Baghdad, killing 11 people and wounding 40, including a U.S. soldier, according to The Associated Press.A few hours later, gunmen in four cars swarmed and attacked a convoy ferrying Mosul's governor, Youssef Kashmola, on a road from Tikrit to Bayji. The governor reportedly survived initially, but died later while in a hospital.

In other corporate news, Reuters reported that Oracle ( ORCL) will affirm its quarterly financial outlook in a meeting with analysts later Wednesday. Shares of Oracle closed down 21 cents, or 1.9%, to $10.79.

Apple Computer ( AAPL) said after the close that its second-quarter net income that more than tripled on strong sales of iPod digital music players. It earned $61 million, or 16 cents a share, up from $19 million, or 5 cents a share, in the same quarter last year. After closing up 1.2% during the session, its shares were recently up 17 cents, or 0.6%, to $29.75 in after-hours trading.

Juniper Networks ( JNPR) surged $2.59, or 11.8%, to $24.59 after saying second-quarter earnings roughly tripled to a pro forma $42.7 million, or 8 cents a share, and raised guidance for the current period. The second-quarter number was about twice analysts' estimates as revenue shot up 86% to $307 million. The stock rose $2.25 to $24.25.

Bank of America ( BAC) said its second-quarter net income rose 41%, driven in part by its merger with FleetBoston Financial. It earned $3.85 billion, or $1.86 a share, up from $2.74 billion, or $1.80 a share, in the same quarter last year. Its shares closed down 83 cents, or 1%, to $84.30.

McDonald's ( MCD) said in an early morning announcement that second-quarter earnings should rise by about 27% from a year ago to roughly 47 cents a share, beating the Wall Street consensus. Same-store sales for the three months should rise by 7.8%. Its stock rose $1.11, or 4.2%, to $27.79.

Overseas markets were mixed, with London's FTSE 100 swinging to a gain before its close of 0.3% to 4373 and Germany's Xetra DAX ending down 0.1% to 3899. In Asia, Japan's Nikkei shed 2.2% to 11,357, while Hong Kong's Hang Seng closed down 1.2% to 11,9333.

On Thursday, the flow in the earnings stream surges, with more than 35 second-quarter reports before the opening bell. Some of the more notable companies scheduled to release results include Citigroup ( C), Marriot ( MAR), Nokia ( NOK), UnitedHealth Group ( UNH) and Wachovia ( WB).

On the economic front, the government will report July's results of the producer price index at 8:30 a.m. EDT. The index is expected to show a 0.2% increase, slowed from the 0.8% jump logged in June. That news will come with a government report on business inventories in May, expected to have gained by 0.6%, up from April's 0.5%, and the Labor Department will release initial unemployment claims figures for the week ended July 10. Economists estimate that claims added 340,000, up from the 310,000 recorded in the previous week.

Then at 9:15 a.m. EDT, Fed is expected to say industrial production slowed to a growth rate of 0.1% in June, down from May's rate of 1.1%. And at noon, the Philadelphia Fed is expected to say its regional manufacturing index sank to 25 in July from the 28.9 reading in June.

After the bell, IBM ( IBM) is expected to report second-quarter profits before special items of $1.12 a share, up from 97 cents a share reported for the same quarter last year.