Technology stocks drove the Nasdaq composite index tantalizingly close to a new closing high, while blue-chip shares tumbled as worries about rising interest rates distracted investors from strong fourth-quarter corporate earnings reports.
The Dow Jones industrial average fell 162.26 to close at 11,560.72. Profit-taking after a Dow rally last week also contributed to some selling.
The Nasdaq rose 66.54, to 4130.81, just shy of its Jan. 3 closing record of 4131.15.
Broader indicators were mixed. The Standard & Poor's 500-stock index fell 10.01, to 1455.14.
The Nasdaq rallied after news of the merger of JDS Uniphase and E-Tek Dynamics, two companies that make components used in optical networking. JDS Uniphase offered $15 billion, or about $211 per share, for E-Tek, helping shares of E-Tek soar 42 1/2, to 178 3/8. JDS Uniphase ended up 3 1/2 at 195-11/16.
Microsoft, which released its earnings after the close of Wall Street's regular trading session, rose 3-1/16, to 115-3/16, as investors anticipated a strong report. In extended-hours trading, Microsoft slipped back to 112 1/2 after the company reported profits that beat official estimates but missed the most optimistic projections circulating among Wall Street traders.
The Nasdaq rally was a return to form for the index, which soared 86 percent in 1999 on the strength of large, well-established technology companies. At the start of 2000, a bout of profit-taking knocked the index nearly 10 percent below its peak.
Last week, however, the Nasdaq resumed its trek toward a new record as investors proved unwilling to abandon technology stocks.
Several Fortune 500 companies reported stronger-than-expected fourth-quarter earnings, including pharmaceutical firm Pfizer and financial services companies Citigroup and PaineWebber.
Despite their strong profit reports, Pfizer slipped 1/2, to 36 1/2, and Citigroup finished up just 1/2 at 58 1/2.
Many investors were distracted by concerns about interest rates as the yield on the Treasury's 30-year bond reached its highest level since July 1997. The price of the Treasury's benchmark 30-year bond fell $6.87 1/2 per $1,000 invested, and its yield rose to 6.75 percent, from 6.69 percent late Friday. Financial markets were closed Monday for the Martin Luther King holiday.
Analysts expect the Federal Reserve to boost interest rates a quarter of a percentage point when it meets Feb. 1-2.
Financial companies, which are most sensitive to interest-rate changes, were mostly lower. American Express fell 7-15/16, to 151-9/16, dragging the Dow lower.
Pharmaceutical concerns, which have rallied so far this year, slumped after Monday's announcement of the planned merger of British drugmakers SmithKline Beecham and Glaxo Wellcome. SmithKline's U.S. shares fell 8, to 62, and Glaxo's U.S. shares dropped 5-15/16, to 54-1/16.