"It's more of the geopolitical fears. Most of the corporate news is positive. The retail stores beat expectations, and so the consumer is still in the market. ... But there's lot of rhetoric about the next terrorism attack. When it will be, and where?" said Arthur Hogan, chief market analyst at Jefferies & Co.

The technology sector registered the biggest drop, having enjoyed the sharpest gains last week. The Nasdaq composite index closed down 37.40, or 2.2 percent, at 1,664.19, according to preliminary calculations. The Nasdaq, which fell 39.80 yesterday, jumped 140.54, or 8.8 percent, last week.

The market's other major indexes also dropped. The Dow Jones industrial average fell 123.79, or 1.2 percent, to 10,105.71. Combined with yesterday's 123-point drop, the Dow has lost more than half of last week's 413.16-point gain.

The Standard & Poor's 500 index sank 12.00, or almost 1.1 percent, to 1,079.88.

It was the second straight day that fears about terror attacks prompted selling. Yesterday, stocks fell after the FBI said that suicide bombings in the United States are inevitable and Vice President Dick Cheney on Sunday warned that terrorism threats should be taken seriously.

"There is so much caution in the air. The mounting anxiety of terror attacks and the uneven economic recovery have been responsible for a rather-be-safe-than-sorry mode," said Alan Ackerman, executive vice president of Fahnestock & Co.

Retailing shares fell, despite a string of better-than-expected first-quarter earnings that included those of Home Depot and Target.

Home Depot sank $3.60, or 7.4 percent, to $44.90 as its shares were downgraded by A.G. Edwards to "hold" from "buy." Target fell $1.16 to $41.54.