Blue-chip stocks collapsed in the final half-hour of trading, deflating a rally fueled by the proposed $9.3 billion merger of Dow Chemical and Union Carbide. The broader market, plagued by fears of inflation, declined much more steeply.

The Dow Jones industrial average fell 2.54 points to close at 10,674.77. The Dow, following what is becoming a familiar pattern, gave up nearly all its gains late in the day and wiped out what had been a 152-point advance.

Other market indicators fared worse. The Standard & Poor's 500 fell 16.85, to 1305.33, and the Nasdaq composite index fell 48.07, to 2539.92.

Analysts said the market fell prey to continuing worries that the Federal Reserve will raise interest rates in an attempt to stave off inflation.

"The market has gone from an emphasis on corporate earnings, which provided good news, to a hunt for signs of inflation," said Philip S. Dow, director of equity strategy at Dain Rauscher Wessels in Minneapolis. "That's hurting stocks."

The possibility of higher interest rates continued to hit high-priced technology companies the hardest. The Nasdaq, which is dominated by technology stocks, ended today's session 11.3 percent below its July 16 record of 2864.48. Traditionally, Wall Street considers a drop of at least 10 percent a correction, a milestone symbolizing weakness in markets.

Internet bookseller Amazon.com fell 6 1/2, to 88 3/8, while online auctioneer eBay dropped 8 1/2, to 75 7/8.

"Some new valuations for Internet stocks are being tested," Dow said, suggesting that the shares are returning to prices that more accurately reflect their future earnings potential.

For most of the day, the Dow average appeared well equipped to buck the weakness in the broader market, even as most of its gains came from one component, Union Carbide.

Dow Chemical said it will buy Union Carbide, creating the No. 2 chemical company, behind DuPont. Union Carbide soared 10-11/16, while Dow Chemical fell 6-5/16 to 118 3/8.

Other companies that make basic materials such as chemicals and paper rose as well. International Paper, another stock in the Dow average, rose 2-15/16, to 54-15/16.

But traders and analysts didn't trust the rally, and by afternoon most Dow stocks ended lower. Financial companies, which are highly vulnerable to interest-rate concerns, led the decline. JP Morgan fell 3-3/16, to 124 1/8.

"The market is lacking any conviction," said Richard Cripps, chief market strategist for Legg Mason in Baltimore. "The market lacks any real incentives for buyers to come in, and some selling pressure definitely remains."

Bond prices, which have tumbled amid the growing belief that the Federal Reserve will raise interest rates, recovered today as the Treasury Department said it would reduce bond sales and proposed a buyback of part of the national debt.

The yield on the benchmark 30-year Treasury bond fell to 6.09 percent, from 6.16 percent late Tuesday, as its price rose $7.81 per $1,000 invested. But analysts say the yield remains high enough to lure some investors away from stocks.

Stocks were expected to stay in a fairly narrow range through Friday, when the Labor Department releases its monthly unemployment report. The report is expected to offer the latest indication of whether wage pressures are escalating enough to persuade the Fed to raise rates.

Even then, stocks may continue to falter until the Fed makes its decision at an Aug. 24 meeting, analysts said.

"The only good news for this market is that it is oversold," said Cripps. "That could leave us ripe for a pretty good rally."