"Yahoo! didn't deliver significant upside and it's a huge momentum name, so you have some momentum taken out of the market," said Keith Keenan, vice president of institutional trading at Wall Street Access, a New York-based brokerage firm. "The bulls anticipated much higher numbers."

The Dow closed down 120.17, or 1.3 percent, at 9,036.04, having lost 66 points yesterday. It was the sharpest point drop since June 23, when the blue chips closed 127.80 points lower.

The broader market also declined. The Nasdaq composite index dropped 31.77, or 1.8 percent, to 1,715.69. The Standard & Poor's 500 index fell 13.54, or 1.4 percent, to 988.67.

Yahoo slid $2.73, or 7.7 percent, to $32.56 after the Internet company reported quarterly profit doubled. The result was in line with forecasts, but First Albany lowered the company's stock rating to "neutral" from "buy," citing in part possible overvaluation.

The Labor Department reported today that new jobless claims rose last week by a seasonally adjusted 5,000 to 439,000, the highest level since the week ending May 31. Economists were expecting a decline in claims.

Comments from Federal Reserve chairman Alan Greenspan that high natural gas prices might not be alleviated any time soon also appeared to pressure shares. Greenspan said the high prices will likely cause some industries to lose business to foreign competitors, but added that the overall economic impact was unclear.

Stocks have surged in recent months as investors grow increasingly upbeat about a solid economic recovery by year's end. But analysts say investors now want to see more concrete evidence of improvement, particularly in the tech sector, which has seen particularly strong gains.

Still, analysts described today's declines as more of a natural pullback. On Tuesday, the Nasdaq composite reached a near 15-month high, while the Dow and S&P traded at levels not seen in a year.

"Overall, the market is going to be a lot choppier than we've seen the last few months," said Steven Goldman, chief market strategist, Weeden & Co. in Greenwich, Conn. "When we punch out to new highs, you become vulnerable to setbacks along the way."

Keenan agreed. He said stocks will likely trade in a range in the coming weeks as companies largely meet, if not slightly beat, estimates during the second-quarter earnings season.

"At this point I don't think you'll see a huge trend reversal," Keenan said.

Abbott Laboratories fell 13 cents to $43.55 after the company posted operating profits that were in line with previous estimates.

Several retailers took a hit following reports of tepid June sales. Wal-Mart slipped 13 cents to $55.63 after posting a small sales gain that fell below estimates.