"The biggest thing, the largest issue at hand is that Treasury prices took a substantial hit and made people nervous. That put a spook in the equity markets," said Arthur Hogan, chief market analyst at Jefferies & Co.

The downturn in the bond and stock markets followed yesterday’s decision by the Federal Reserve to leave interest rates untouched and at 45-year lows. Investors sold bonds on the belief that interest rates will rise as the economy improves; stocks, meanwhile, fell on concerns that rising yields will make bonds more attractive than equities.

However, analysts didn’t agree on the degree to which the bond downturn affected stocks today. Some said stocks fell due mostly to profit-taking following recent gains and due to extremely light trading volume.

"Nobody is around. … It is hard to get deals done," said Michael Murphy, head equities trader at Wachovia Securities.

The Dow Jones industrial average closed down 38.30, or 0.4 percent, to 9,271.76. The retreat followed a five-day gain of 273.74.

The broader market also ended lower. The Standard & Poor’s 500 index declined 6.32, or 0.6 percent, to 984.03, after its own five-day winning streak. The Nasdaq composite index, up in the past two sessions, slipped 0.42, or 0.02 percent, to 1,686.59.

In late afternoon in the bond market, the price of the Treasury’s benchmark 10-year note was down 1 point, while its yield rose to 4.57 percent from 4.44 late Tuesday. Prices and yields move in opposite directions.

The decline in the stock market was expected: With investors having already factored in better-than-anticipated second-quarter earnings and an economic turnaround, analysts say stocks are at premium levels and are prone to retreat a bit.

Volume has also been a factor, with the number of shares changing hands being very thin as many traders and investors are on summer vacation. Put simply, it takes very little to push the market lower these days.

Dynegy declined 13 cents to $3.04 after cutting its 2003 earnings outlook.

Clorox fell $1.49 to $42.38, having climbed $1.05 in the previous session when it released quarterly profits that met expectations.

Halliburton fell 26 cents to $23.07 after the oil field services company said rising asbestos claims could derail a deal negotiated in December to settle its asbestos litigation.

Gainers included Payless ShoeSource, which rose 49 cents to $14.02 on second-quarter earnings that beat analysts’ expectations by 6 cents a share.

Despite today’s slippage, analysts maintain that most investors remain confident that the economy will rebound in the second half of the year. "The stock market has been performing very well on the notion the economy is getting better," said Kevin Caron, market strategist at Ryan, Beck & Co., LLC.