Retailers were punished after Wal-Mart lowered its December sales expectations.

An afternoon selloff ended a rally that had been sparked by a government report indicating that new claims for unemployment benefits were dropping. The Dow Jones industrial average climbed more than 116 points before reversing direction.

At the end of regular trading, the Dow was down 15.50, or 0.18 percent, at 8,432.61. Declines in Amazon.com and Microsoft helped pull the Nasdaq composite index down 4.58, or 0.33 percent, to 1,367.89, while the Standard & Poor's 500 was off 2.81, or 0.31 percent, at 889.66.

The Russell 2000 Index, which tracks the shares of smaller companies, eked out a small gain, rising 1.28, or 0.33 percent, to 389.40.

Investors turned bearish after the U.S. military said warplanes from the U.S.-British coalition bombed Iraqi military command and communication targets yesterday in southern Iraq. The attack was in retaliation for the downing of an unmanned American surveillance drone on Monday, the military said.

The official Iraqi News Agency, quoting a military spokesman, countered that a mosque had been hit and that three civilians were killed and 16 others wounded in the attack.

The rising tension with Iraq, a major Middle Eastern oil producer, along with the continued strike in Venezuela sent oil prices soaring. Oil prices for February delivery jumped 52 cents to $32.49, and some analysts predict the price could hit $35 soon.

Still, analysts cautioned against reading too much into Thursday's trading.

Barry Berman, head trader for Robert W. Baird & Co. in Milwaukee, Wis., noted that "when volume is light, it doesn't take much to move the market either way."

Ralph Acampora of Prudential Securities in New York attributed yesterday morning's gains to "a lack of sellers" and said trading continued a pattern of a short-term rally followed by a short-term decline.

"I think it is part of the market trying to bottom out in anticipation of a better year in 2003," he said.

Wal-Mart said it was cutting its December same-stores sales forecast and now expects sales to rise 2 percent to 3 percent. It had predicted sales at the low end of a 3 percent to 5 percent range.

Investors apparently anticipated the reduced sales figures and sent Wal-Mart share up 6 cents to $49.76. But Federated fell 24 cents to $27.66, and Amazon.com dropped $1.58 to $20.30.

The decline for Amazon.com came despite the online retailer's announcement that it finished its "busiest holiday season ever."

Declining shares exceeded advancers by 9 to 7 on the New York Stock Exchange, where consolidated volume was 907.07 million shares, compared with 586.12 million in Tuesday's abbreviated session.