A surprisingly weak employment report on Friday blindsided a market already weakened by poor corporate earnings and sent the Standard & Poor's 500 index to levels unseen since late 1998.

Unemployment surged to 4.9 percent in August, its highest level in almost four years, as companies hacked workers from their payrolls, the government said in a startlingly bleak report.

The S&P 500 fell 20.62 points, or 1.86 percent, to end at 1,085.78, dropping below the low set in early April and skidding to a finish unseen since late October 1998.

The blue-chip Dow Jones Industrial average lost 234.99 points, or 2.39 percent, to 9,605.85, a low unseen since April 4.

Amid the carnage among industrial and cyclical stocks, technology shares fared relatively better with support from Intel Corp. The chip giant announced after Thursday's close that sales for the third quarter will be within a range the company set in July.

The Nasdaq Composite Index dropped a comparatively modest 17.96 points, or 1.05 percent, to 1,687.68. Intel slipped 21 cents to $25.89.

For the week, holiday-shortened to four trading days by the U.S. Labor Day holiday, the Dow fell 3.5 percent, S&P 500 was off 4.2 percent, and Nasdaq tumbled 6.5 percent.

Year-to-date, the Dow is off nearly 11 percent, S&P off 17.8 percent, and Nasdaq has fallen 31.7 percent.

The Dow and S&P's freefall reflects Wall Street's growing frustration in its inability to predict a turnaround. Many analysts now believe it will be early 2002 before business starts to stabilize.

"(The unemployment rate) was probably the initial catalyst to get investors thinking on the downside rather than the upside,'' said Charlie Crane, a strategist at Victory SBSF Capital Management, which oversees $4 billion. ``I think were are going to be in this state of 'Grow or no grow?' for a while. Some economic statistics seem to give a glimmer of hope and others dash that glimmer.''

The employment report was far weaker than private economists had expected and is likely to bolster expectations of further interest rate cuts by the Federal Reserve. In a Reuters survey, U.S. economists had said they expected the unemployment rate to edge up to only 4.6 percent in August.

Job losses were especially steep in the beleaguered manufacturing sector, which has shed more than a million positions since the middle of last year, the Labor Department said.

The Nasdaq briefly clawed into positive ground during the day as investors scoured for bargains after the week's plunge. The index quickly weakened again, but some heavyweights managed to scrape out a gain by the end of the day.

Networking computer maker Sun Microsystems Inc. gained 13 cents to $10.59. Business software maker Oracle Corp. added 15 cents to $11.07.

``There is some bottom-fishing going on in the Nasdaq, because it was the index that suffered the most,'' said Milton Ezrati, senior economist and strategist at Lord Abbett & Co., which oversees $40 billion.

Stocks of homebuilders dropped -- a sign that investors were beginning to lose confidence in the housing market, which has helped prop up the ailing economy. The Standard & Poor's Homebuilding index sank 5.35 percent.

Home Depot Inc., the world's largest home improvement retailer, fell $2.60 to $40.95. Wal-Mart Stores Inc., the world's largest retailer, dropped $1.15 to $46.22. Both pulled the blue-chip Dow lower.

Intel Corp., a Dow component and Nasdaq heavyweight, was unable to buoy the market, losing 21 cents to $25.89 after wobbling between gains and losses. The world's largest microchip maker said its sales will likely land within the range of analysts' forecasts.

Internet retailer eBay Inc. fell $2.14 to $52.95 on plans to issue $1 billion of common stock. The proceeds will be used for general corporate purposes, including capital expenditures, according to a filing with the U.S. Securities and Exchange Commission.

Indigo NV rose 66 cents to $6.96. Computer and printer manufacturer Hewlett-Packard Co., which earlier this week made a $25 billion bid for Compaq Computer Corp., will pay up to $882 million in stock and cash to buy Indigo.

H-P, which rose 38 cents to $18.08, already has a minority stake in Indigo, which makes machines that churn out color prints.

Circuit City Stores Inc. dropped $3.56 to $12.70. The electronics retailer's second-quarter sales slumped 21 percent and it expects a fiscal first-half loss, due to its exit from the major appliance business and soft computer sales.

Aerospace giant Boeing Co. sank $3.66 to $45.18 after Morgan Stanley cut its rating on the stock and warned that its profits and commercial jet sales could sag in 2003.

Nortel Networks Corp. rose 17 cents to $5.53. The troubled maker of telecommunications gear said it has ``at least 12 months of drought'' ahead, but noted the ''re-sizing'' of the company was running ahead of schedule.

TRW Inc. dropped $1.60 to $33.24. The diversified aerospace and auto products maker plans to slash its dividend by 50 percent, cut costs at its corporate headquarters by 30 percent and chop headquarters staff by 20 percent.

Declining stocks beat out advancers on the New York Stock Exchange by more than a 2-to-1 margin. Losers outnumbered winners on the Nasdaq 2 to 1. Based on the latest available numbers, 1.4 billion shares changed hands on the Big Board and 1.7 billion on Nasdaq.

The Russell 2000 index fell 8.20 to 445.19.

Overseas, Japan's Nikkei Stock Average slipped 1.3 percent after the government reported that the economy shrank 0.8 percent in the April-June quarter - evidence the global slowdown is hindering efforts to escape recession.

The benchmark 225-issue Nikkei closed down 133.54 points at 10,516.79 after losing as much as 2 percent earlier in the session.

In Europe, Germany's DAX index lost nearly 3 percent, Britain's FT-SE 100 dropped 2.6 percent, and France's CAC-40 fell 1.5 percent.

Reuters and the Associated Press contributed to this report.