"I think the London incident gave investors an excuse to take some money off the table after reaching new highs yesterday," said Peter Cardillo, chief strategist and senior vice president at S.W. Bach & Co. "Otherwise, the news was outstanding. The China revaluation is great news, and a step in the right direction. Earnings are coming in better than expected. Oil is down. But London gave the markets some jitters, certainly."

China's news that it would float its currency against a basket of other currencies was seen as positive — possibly giving U.S. exporters more opportunities in China. The move was also seen as a boon to blue-chip companies, many of which have benefited from China's economic boom. Bonds fell sharply, however, on fears that higher import prices could spur inflation.

The Dow Jones industrial average dropped 61.38, or 0.57 percent, to 10,627.77.

Broader stock indicators were narrowly lower. The Standard & Poor's 500 index fell 8.16, or 0.66 percent, to 1,227.04, and the Nasdaq composite index slipped fell 9.97, or 0.46 percent, to 2,178.60. Both the S&P and Nasdaq set new four-year highs on yesterday.

China's currency move sent bonds tumbling, with the yield on the 10-year Treasury note rising to 4.29 percent from 4.18 percent late yesterday. The dollar fell against most major currencies following China's decision, which traders felt would benefit Asian and European currencies over the dollar. Gold prices were unchanged.

The United States had pressured China to revalue its currency for some time, accusing the country of keeping its yuan artificially low in order to undercut U.S. manufacturers.

"I think this is definitely, score one for investors, with probably a zero score for consumers," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "It's very unlikely that this will result in higher consumer prices here, but exporters should see some benefit, especially large-cap and growth companies."

Federal Reserve Chairman Alan Greenspan hailed China's move as a good first step, and reiterated his bullish outlook on the economy in a second day of congressional testimony. His forecast was backed by the latest reading of the Conference Board's index of leading economic indicators, which rose 0.9 percent in June, the largest increase since December 2003.

In addition, the Labor Department reported first-time jobless claims fell sharply, down 34,000 to 303,000 last week. Investors welcomed the report as a sign of continued economic growth. And oil prices fell as fears of hurricane damage in the Gulf of Mexico eased, with a barrel of light crude at $57.13, down 89 cents, on the New York Mercantile Exchange.

Earnings from major corporations were mostly positive. The technology sector got a boost as eBay Inc., the online auctioneer, posted a 53 percent increase in second-quarter earnings and trounced Wall Street profit expectations by 4 cents per share. EBay, whose stock was pummeled after a first-quarter earnings disappointment, soared 20 percent, or $7.23, to $42.10.

Coca-Cola Co. rose 62 cents to $43.95 after it saw a 9 percent jump in quarterly profits and beat analysts' forecasts by 4 cents per share after one-time items. A mediocre domestic sales performance was outweighed by strong international sales for the Dow industrial.

Fellow Dow component McDonald's Corp. had solid, if somewhat lackluster, earnings that came in above Wall Street's expectations. New menu items helped overcome a tax hit from repatriating international income. McDonald's fell 12 cents to $30.78.

Merck & Co. fell 47 cents to $31.38 as it reported a 59 percent drop in profits. Like McDonald's, the drugmaker's bottom line was hurt by repatriating $15 billion in overseas profits. However, a lack of sales from the painkiller Vioxx — Merck's best-selling drug before it was pulled off the shelves due to severe health risks — also hurt the company.

Investors bid Google Inc. and Microsoft Corp. higher before the two reported after the close of trading.

Google climbed $1.94 to $313.94. Although its profit quadrupled, it fell $21.19 to $292.75 in extended trading after the company said it sees seasonal slowness in the third quarter.

Microsoft Corp. closed 25 cents higher at $26.44, then fell 49 cents to $25.95 in after-hours trading after investors found its guidance unexciting.

Declining issues outnumbered advancers by nearly 2 to 1 on the New York Stock Exchange, where volume came to 1.58 billion shares, even with yeesterday's volume.

The Russell 2000 index of smaller companies fell 10.46, or 1.54 percent, to 667.10.

Overseas, Japan's Nikkei stock average fell 0.02 percent. In Europe, Britain's FTSE 100 closed up 0.12 percent, France's CAC-40 rose 0.16 percent for the session, and Germany's DAX index surged 0.95 percent in late trading.