Wall Street jitters of the past few weeks have taken their toll on mutual funds. U.S. diversified equity funds were down 5.38 percent on average in the three months ended Sept. 30, after an 11 percent gain in the second quarter, according to Lipper Inc.

For fund managers, the good news was that managed funds outperformed the Standard & Poor's 500-stock index category for the second quarter in a row after lagging behind index funds for several years. The index funds were down 6.35 percent in the quarter.

Among the losing fund categories were multi-cap value funds (down 9.65 percent), mid-cap value funds (down 8.92 percent) and equity income funds (down 8.60 percent), according to Lipper, a New York firm that tracks mutual fund performance.

Those that bucked the trend were the science and technology funds (up 7.02 percent), gold-oriented funds (up 18.47 percent), and Japanese funds (up 22.97 percent). On the whole, though, sector equity funds lost 3.5 percent in the third quarter.

What went wrong? Stock market investors basking in the glow of a booming economy suddenly grew wary. Record retail spending and low unemployment figures heightened fears of inflation, especially after the August decision by Federal Reserve policymakers to raise short-term interest rates.

The Dow Jones industrial average fell from 11,193.70 points on July 9 to 10,336.95 by the end of September--a drop of 7.65 percent. The broad-based S&P 500-stock index came down in tow, falling from 1391.22 on July 2 to 1282.71 Thursday--down 7.8 percent. The exception to tumbling indexes was the technology-heavy Nasdaq composite index, which ended the quarter 5 points higher than its July 2 mark of 2741.02.

During the first quarter, fund managers were focused on the most popular growth stocks, and by the second quarter their attention had spread to value stocks and small-cap stocks. Some fund managers expected the market to broaden further in the third quarter, but it didn't. Instead, the market uncertainty hurt stocks in general.

"It was tough for money managers to have predicted the market volatility," said Louis S. Harvey, president of Boston-based Dalbar Inc., a fund research firm.

Investors became impressed with the recovery in Japan, and funds that invest there were the top performers. International small-cap funds did well too, returning 9.31 percent. But emerging markets funds, Latin American funds and China-region funds were battered badly, each losing from 6 percent to 11 percent.

"Japan is generally negatively correlated to the U.S. market, so it is not surprising that Japanese funds were up," said Jan Holman, vice president of investment services at American Express.

Analysts expect the fourth quarter to be somewhat better, with the key indexes staying within a narrow band. The earnings outlook is improving, "and the bad news seems to be running out," said Michael Farr, president and chief investment officer of the District-based Farr, Miller & Washington, a financial consulting firm.