Stocks Sag on Nortel, Terrorism Warning

Stocks dropped on Tuesday, eroding two days of gains, after the surprise resignation of tech heavyweight Nortel Networks' chief financial officer and a warning of another potential terrorist attack against the United States.

The blue-chip Dow Jones Industrial average dropped 21.04 points, or 0.21 percent, to 9,863.74. The Dow climbed 259.34 in the previous two sessions. The tech-loaded Nasdaq composite index fell 12.44 points, or 0.67 percent, to 1,834.22, and the Standard & Poor's 500 index fell 4.44 points, or 0.4 percent, to 1,107.50.

"There's a crisis of confidence out there in the very near term," said Larry Rice, chief investment officer at Fahnestock & Co. "Economic recovery is spotty at best ... valuations are still high."

Investors are on edge after a series of accounting scandals, starting with collapsed energy trader Enron Corp. to, most recently, bankrupt telecom firm Global Crossing . Nortel slumped more than 6 percent, although the Canadian firm said stock deals leading to the executive's departure were not part of a wider scandal.

Lingering nervousness about other potential accounting blowups, uncertainty about the economy, fears of a possible attack on the United States and lackluster trading conditions kept the market under pressure.

"I still think the accounting issues hang over the market like a dark cloud," said Eric Gustafson, portfolio manager at Stein, Roe & Farnham. "Every day that we can complete without any further accounting scandals is healthy for the market."

Trading volumes were moderate as uncertainty kept many investors on the sidelines. On the Big Board about 1.1 billion shares changed hands, while about 1.5 billion were traded on Nasdaq.

"There's not a whole lot of inspiration out there," said Donna Van Vlack, director of trading at Brandywine Asset Management, which oversees $7 billion. "It's still a muddling-through process, and I don't think there's anything compelling to seize onto to really get aggressive in either direction."

A warning by the Federal Bureau of Investigation about a possible attack on the United States or its interests in Yemen added more uncertainty to Wall Street. It was the fourth alert in little more than five months after the Sept. 11 attacks that killed thousands in New York and near Washington D.C.

Accounting issues, however, took center stage.

Harley-Davidson Inc. fell more than 5 percent as investors fretted over the company recorded gains on sales of loans and worried about a possible slowdown in demand for its distinctive heavyweight motorcycles. It dropped $3.04 to $50.99.

EMC Corp. dropped $1.04 to $14. The U.S. Securities and Exchange Commission last month met with a former EMC executive who has accused the world's No. 1 maker of data-storage systems of improperly booking revenue with some customers, according to people familiar with the situation.

Tyco International , which recently found itself swept up in post-Enron accounting concerns, fell $1.30 to $30.50, and was the New York Stock Exchange's most actively traded stock.

"We have seen that pessimism about 'Enronitis' may have been overblown, but there are definitely other shoes to drop," said Richard Babson, chairman of Babson-United Investment Advisors Inc. "There is more to be revealed out there."

Former Enron Chairman Kenneth Lay appeared before the Senate Commerce Committee Tuesday but refused to testify under his Fifth Amendment right against self-incrimination. The congressional hearings are keeping the accounting scandal that helped spark Enron's blockbuster bankruptcy fresh in investors' minds.

Nortel said its chief financial officer quit after buying and selling company stock within his retirement plan in violation of company policy. Nortel added in a separate statement that weak customer demand will make it hard to meet first-quarter revenue targets. Nortel fell 42 cents to $6.42 and was among the most active stocks on the NYSE.

The Standard & Poor's communications equipment index fell 2.78 percent. Lucent Technologies Inc. slumped 26 cents to $5.99. Corning Inc. lost 21 cents to $8.04. JDS Uniphase Corp. surrendered 37 cents to $6.55, and Ciena Corp. dropped 39 cents to $10.08. Cisco Systems Inc. eased 43 cents to $17.26.

ImClone Systems Inc. rose 82 cents to $17.65. The company rejected demands by Bristol-Myers Squibb Co. that it surrender a greater share of future profits from a cancer drug the companies are developing and that its two top executives step down. Bristol-Myers added 21 cents to $45.38.

Recent economic numbers have hinted the sagging U.S. economy may be recovering, but investors are demanding more proof. Wednesday, the Commerce Department will release January retail sales numbers. The calendar of data gets busier as the week draws to a close, ending with reports on industrial production and consumer sentiment Friday

The Russell 2000 index, the barometer of smaller company stocks, inched up 0.69, or 0.2 percent, to 472.01.

Overseas, markets were mixed Tuesday with Japan's Nikkei stock average finishing up nearly 2.0 percent. But in Europe, France's CAC-40 and Britain's FT-SE 100 each ended down 0.3 percent, while Germany's DAX index fell 1.1 percent.

Reuters and the Associated Press contributed to this report.