“Portfolio managers have decided to back away. They have lost their nerve,” said Hugh Johnson, chief investment officer at First Albany. “They are asking: ‘Will the rise in interest rates impact consumer spending and business spending?’ It may very well.”

Analysts also attributed today’s losses to the powerful car bomb explosion outside the Marriott hotel in downtown Jakarta today. The apparent suicide attack killed 13 people and wounded 149, including two Americans.

“To some extent, the markets continue to be shocked by acts of terrorism,” Johnson said.

The Dow closed down 149.72, or 1.6 percent, at 9,036.32, according to preliminary calculations. The Nasdaq composite index dropped 40.50, or 2.4 percent, to 1,673.56. The Standard & Poor’s 500 index fell 17.35, or 1.8 percent, to 965.47.

“It really has to do with the fear that a lot of people have that the rise in interest rates is going to be a detriment to economic momentum,” said Ned Riley, chief investment strategist at State Street Global Advisors.

Since the middle of June, the 10-year Treasury note has risen to about 4.3 percent from just over 3.0 percent, due largely to signals that the economy is rebounding and the Federal Reserve is being less aggressive.

“The market today is reflecting that it has been shocked — shocked by a sharp rise in interest rates. … (That shock) siphons off money from the stock market into the bond market, and generates worries about the stock market and earnings,” Johnson said.

Analysts said investors are worried that stock prices have climbed too high, too fast. Stocks have risen significantly from their March 11 lows for the year. Despite recent selling and through Tuesday’s session, the Dow remains up 20.1 percent, while the Nasdaq is still up 31.6 percent and the S&P is up 20.6 percent.

Analysts predict stocks will give ground during August, typically a slow month on Wall Street as investors await the next batch of economic news due out in the fall and as traders take summer vacations.

Costco Wholesale dropped $6.81, or 18.4 percent, to $30.15 after cutting its earnings estimates for the rest of the year. The discount retailer cited higher health care and workers’ compensation cost along with greater operating expenses in the first eight weeks of this quarter.

The profit warning overshadowed Costco’s upbeat same-store sales for July. Last month’s same-store sales, those at stores open at least one year, rose 8 percent. And, the warning also hurt rival BJ’s Wholesale Club, which fell $1.95 to $17.24.

Gillette declined 16 cents to $30.21 following bearish comments from the company — the consumer products maker said it is losing market share in the razor blade business to Schick and that could cut into 2003 and 2004 earnings.