Analysts blamed the selling on portfolio managers looking to unload poor performing stocks before the end of the quarter Thursday. Investors were also nervously awaiting two key economic reports due on Friday, including the Labor Department's March employment figures and the Institute for Supply Management's monthly report on the industrial sector.

Investors discounted the latest reading of the Conference Board's Consumer Confidence Index, which showed a larger-than-expected drop in confidence for March. The index reading came in at 102.4, less than the 103 forecast from Wall Street and the 104 reading in February.

"To some extent, we can expect to be pretty trendless until Friday," said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors. "There's nervousness, you have people tip-toeing around, and nobody's really getting into the market in any meaningful way."

The Dow Jones industrial average fell 79.95, or 0.76 percent, to 10,405.70, its lowest close since Jan. 24.

Broader stock indicators also gave ground. The Standard & Poor's 500 index was down 8.92, or 0.76 percent, at 1,165.36, also the worst showing since Jan. 24. The Nasdaq composite index lost 18.64, or 0.94 percent, to 1,973.88, the worst close for the index since Oct. 27.

The Nasdaq's drop was on par with the other major indexes, with no real standouts leading the losses, but the new five-month low illustrates how far the technology and small-cap-oriented index has fallen out of favor with investors.

Caterpillar Inc. led the decliners on the Dow, tumbling $4.42 to $89.80 after a Morgan Stanley analyst said the stock was fairly valued and urged investors to collect profits.

Industrials and consumer discretionary stocks fell on fears that consumers would be parsimonious this year, though all the major sectors saw losses for the session. Rising energy prices was also a factor in the selling Tuesday, as they have been all month.

"We've been in kind of a downward trend overall this year, and there's nothing real positive that I can see to shake us out of it," said Brian Bruce, director of global investments at PanAgora Asset Management Inc. "It's going to take a number of positive things, from both an economic and individual company basis, for the market to get some momentum and enthusiasm going."

Crude oil prices rose in afternoon trading, with a barrel of light crude settling at $54.23, up 18 cents, on the New York Mercantile Exchange. Bonds recovered from Monday's selling, with the yield on the 10-year Treasury note falling to 4.58 percent from 4.64 percent late Monday. The dollar was mixed against other currencies, while gold prices rose.

Wall Street watched closely as the latest move in the MCI-Verizon-Qwest merger battle unfolded. MCI Inc. rose 84 cents to $23.78 after it accepted Verizon Communications Inc.'s improved $7.6 billion offer, valued at $23.50 per share, including $8.75 in cash per share.

Verizon's offer, which was increased by nearly $1 billion, was still lower than Qwest Communications International Inc.'s $25.60 per share bid, but analysts said Verizon was a better match for the former WorldCom Inc. Verizon gained 14 cents to $34.86, while Qwest added 4 cents to $3.79.

Hewlett-Packard Co. has settled on a new chief executive, according to The Wall Street Journal. NCR Corp. CEO Mark Hurd, credited with turning NCR's fortunes around, is reportedly H-P's choice to replace former CEO Carly Fiorina. Hewlett-Packard climbed $1.99, or 10.1 percent, to $21.78 on the reports, while NCR tumbled $6.50, or 17.2 percent, to $31.40.

Morgan Stanley slid $1.87 to $53.61 after a management shakeup in response to the company's lagging stock price. The company said President Stephan Newhouse would be replaced by two co-presidents, company executives Stephen Crawford and Zoe Cruz. However, former executives and current shareholders who have been lobbying for change said the move was inadequate.

Insurer American International Group Inc. said Maurice "Hank" Greenberg would not stay on as non-executive chairman. Two weeks after his ouster as chief executive officer, the company said Greenberg will be replaced as chairman by Frank G. Zarb on an interim basis. AIG rose $1.18 to $58.20.

Dow component Pfizer Inc. dropped 59 cents to $25.64 after an Austrian court ruled that its patent on the cholesterol drug Lipitor was invalid. The ruling could open up generic competition for the popular drug far earlier than Pfizer anticipated.

Declining issues outnumbered advancers by more than 5 to 2 on the New York Stock Exchange, where preliminary consolidated volume came to 2.22 billion shares, compared with 1.72 billion traded on Monday.

The Russell 2000 index of smaller companies was down 10.49, or 1.71 percent, at 604.63.

Overseas, Japan's Nikkei stock average tumbled 1.63 percent. In Europe, Britain's FTSE 100 closed down 0.07 percent, France's CAC-40 climbed 0.08 percent for the session, and Germany's DAX index rose 0.19 percent.