"It's a combination of profit-taking and weakness in the dollar that is concerning investors," said Mike Kayes, chief investment officer at Eastover Capital in Charlotte, N.C.

"If the dollar continues to fall, there is increasing risk that foreign investors will pull money out of U.S. stocks and bonds," Kayes said.

The Dow closed down 109.41, or 1.1 percent, to 9,535.41, having risen 1.8 percent the previous week. It was the biggest one-day drop since Aug. 5, when the blue-chip average declined 149.72 points.

The broader market also finished sharply lower. The Nasdaq composite index dropped 31.08, or 1.6 percent, to 1,874.62, after a weekly advance of 2.7 percent.

The Standard & Poor's 500 index fell 13.48, or 1.3 percent, to 1,022.82.

News sends dollar down

Over the weekend, the ministers from the seven largest industrial countries, or G-7, said market forces should determine currency exchange rates, statements that many interpreted as support for a weak dollar. The dollar and overseas markets immediately fell on the news.

Foreign countries dislike a weak dollar because it makes their exports less competitive in overseas markets; U.S. investors, meanwhile, worry that foreign investors will stay away from devalued U.S. markets.

Investors have sent stocks higher since mid-March on a spate of largely upbeat economic reports and earnings news.

Some analysts wonder whether the market might be due for pullbacks, while others believe stocks have the strength to continue upward on growing investor optimism, particularly if third-quarter earnings are strong.

"I think the chance that earnings will continue to be pretty decent is out there," Kayes said. "If earnings are solid, I think the market will do well through the rest of the year."

Scott Wren, equity strategist for A.G. Edwards & Sons, agreed, adding that he doubts the dollar's weakness will pressure equity markets for an extended period.

"It's a knee-jerk reaction," Wren said of yesterday's declines. "We had a huge run here obviously, so investors are taking profits. ... I think it's a little early to get worried that foreigners will start dumping Treasuries."

Financial companies were among the biggest losers from the weak dollar yesterday.

Merrill Lynch & Co. Inc. fell 99 cents to $56.40, while Goldman Sachs & Co. declined $1.07 to $92.66 and Morgan Stanley dropped $1.23 to $51.15.

Wal-Mart Stores Inc. decreased $1.07 to $57.07 even though the world's largest retailer said September sales were on track to be on the high end of its forecasts despite disruptions from Hurricane Isabel.

CarMax Inc. dropped 68 cents to $35.25 after the used-car superstore chain posted a jump in profits but also cut its outlook for the current quarter.

Gainers included Motorola Inc., which rose 97 cents to $12.06, after Christopher Galvin resigned as its chairman and chief executive, citing differences with the board over progress at the cell-phone manufacturer.

Declining issues outnumbered advancers 5 to 2 on the New York Stock Exchange.

Consolidated volume was light at 1.62 billion shares, compared with 1.89 billion traded Friday.

The Russell 2000 index, which tracks smaller company stocks, fell 6.55, or 1.3 percent, to 513.65.

Overseas, Japan's Nikkei stock average finished 4.2 percent lower yesterday.