The fear: Higher interest rates will slow the economy and corporate profit growth, forcing investors to reprice stocks to reflect the less robust conditions, says Hugh Johnson, chief investment officer at First Albany.

Dragged down by such worries, the Dow dropped 127.32 points, or 1.3 percent, to 9,990.02. It marked the 19th time since the Dow first cracked 10,000 on March 29, 1999, that it has relapsed and closed back below the key psychological level. The Dow is down 4.4 percent this year. Selling overseas on rate fears set the tone for Wall Street.

Yesterday's sell-off was broad, infecting blue chips, tech firms and small-company stocks. All three major indexes — the Dow, Nasdaq composite and Standard & Poor's 500 — broke below their March lows and closed at their lowest levels of 2004.

How can this be? Corporate earnings growth is spectacular, the economy is expanding, the jobless rate is improving, and still the stock market sinks. The simplest answer is that the market is spooked by fears of higher interest rates.

Most investors have known for several weeks that the Federal Reserve almost certainly will begin raising short-term rates this year. That concern was reflected in the lower stock prices weeks ago, Johnson said. But two issues weigh on the market. First, the magnitude of the rate hikes — how much and how fast the Fed moves — is anybody's guess. Second, corporate earnings may look impressive at the moment, but skeptics say that could all change in 2005.

Further, the positive effects of the tax cuts and economic stimulus package will begin to subside. And to top it off, some skeptics say that the global economic expansion — specifically in China — will begin to wane. All told, some analysts believe corporate earnings growth could amount to only 3 percent to 4 percent in 2005.

"Investors do have some incentive to lock in gains," said Stuart Freeman, chief equity strategist for A.G. Edwards & Sons.

"Stocks have done very, very well over the past 12 months, and this could be as good as it gets for the next few months."

While it's possible the earnings growth rate could collapse, some say a more realistic view is that it will slow to a still respectable 10 percent. And that growth rate, along with modest interest rate hikes, should bode well for stocks.

The federal funds rate, the overnight lending rate that banks charge one another, stands at 1 percent — the lowest level in 50 years. Many economists believe the Federal Reserve might raise rates a quarter-percentage point at its next meeting, in June.

A small hike such as that, or even a couple of quarter-point hikes over the next few months, would probably not erode stock prices too much, said Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. Inc.

But if the economy becomes overheated and inflation rears its head, the Fed might have to raise rates quickly.

"That is what is spooking some investors," Sonders said.