NEW YORK (CNNmoney) - New worries about terrorism and the economy sent U.S. stocks mostly lower Friday, handing the Dow Jones industrial average its first loss in three days.
But a late rally gave the Nasdaq composite index a 1.93 point gain, enough to send the index further above its pre-terrorist attack levels.
Friday marked the third straight winning week for U.S. stocks, which have wiped out most - and in some cases all - of their losses since hijacked planes hit New York and Washington.
The session's losses began after government data showed rising inflation and a big tumble in consumer spending. That selloff accelerated when a case of anthrax was diagnosed in New York, one day after the FBI warned of possible, unspecified terrorist attacks.
NBC said an employee tested positive for the skin form of the disease, transmitted by letter to the network's Rockefeller Center headquarters. Nearby, parts of the New York Times building were evacuated after the newspaper received a suspicious package.
"The real thing this is highlighting is how severely the market is trading under a cloud of fear," said Jordan Kimmel, fund manager at Magnet Management LLC. "People are really, truly scared."
While blue chips fell, many tech stocks rose, led by Juniper Networks, which surged more than 26 percent after posting a surprisingly strong profit Rival Cisco Systems jumped nearly 3 percent.
Those gains helped the Nasdaq composite index rise 1.93 points to 1,703.40, pushing it 19.6 percent above its Sept. 21. low. The Dow Jones industrial average slid 66.01 points, or 0.7 percent, to 9,342.50, but is up 13.4 percent from Sept. 21.
Up 13 percent from its September low, the Standard & Poor's 500 index lost 5.78 to 1,091.65 Friday.
Stocks finished well off their worst levels of the session.
Still, more stocks fell than rose. On the New York Stock Exchange, declining issues beat advancing1,861 to 1,215 as 1.3 billion shares changed hands. Nasdaq losers topped winners 1,964 to 1,634 as 2.1 billion shares traded.
In other markets, Treasury securities were mostly higher, breaking a three-day losing streak. The dollar edged lower against the euro and yen.
Sifting the data
Stocks opened lower after the Commerce Department said retail sales tumbled 2.4 percent last month, more than three times as much as economists expected, as spending retrenched after the Sept. 11 attacks. Separately, the Producer Price Index, an inflation gauge, rose 0.4 percent last month, lifted by a surge in car prices.
"You don't need an economist to tell you how disastrous they look," Robert Brusca, economist at Ecobest Consulting, told CNNfn's Before Hours.
The drop in September sales suggests that consumers have not resumed pre-attack spending levels. The numbers came one day after retailers, in a series of individual reports, posted mostly disappointing sales figures last month.
Declines in Wal-Mart Stores (WMT: down $0.59 to $52.90, Research, Estimates) pressured the Dow industrials, along with Home Depot (HD: down $1.42 to $41.68, Research, Estimates).
One Friday report encouraged investors. Stocks moved off its worst levels of the morning after the University of Michigan said its index of consumer attitudes rose in a preliminary reading, surprising economists who expected a decline.
But Mike Farrell, portfolio manager at David L. Babson in Cambridge, Mass., expects rising layoffs to dent consumer confidence in the months ahead. The airline industry alone has announced about 80,000 job cuts in the past month.
Explaining the market's pullback Friday, Farrell questioned whether the three-week advance is justified amid the economic shocks from Sept. 11.
"The market seems to be taking a lot of things on the chin," he said. But he asked, "Should stock prices be higher now than before the attack?"
The government has slashed interest rates, cut taxes, and pledged to help struggling business. But many companies are still struggling.
Credit card provider Providian Financial (PVN: down $6.90 to $13.45, Research, Estimates) cut its third-quarter earnings guidance, saying consumers are having trouble paying their debts.
The losses for Providian, the biggest loser on the New York Stock Exchange, spread to rivals MBNA (KRB: down $0.19 to $31.00, Research, Estimates) and Capital One Financial (COF: down $2.90 to $44.80, Research, Estimates).
The latest anthrax case presents a dilemma for authorities, who want people to be cautious without panicking.
"People should not overreact to this," New York Mayor Rudolph Giuliani told a press conference.
Officials said the infected woman is being treated and remains in good health. Her case differs from the lung-borne anthrax that infected a Florida man, killing him.
Magnet's Kimmel expects that the market, because of nervousness, to remain susceptible to these kinds of selloffs. A rumor Thursday that Osama bin Laden had been captured helped ignite a rally. The terrorist suspect remains at large.
Jumping Juniper
Among gainers, Juniper Networks (JNPR: up $4.42 to $21.06, Research, Estimates) posted earnings of 10 cents a share, topping estimates. The board of the networking equipment maker authorized the repurchase of up to $200 million of its stock during the next two years.
Rival Cisco Systems (CSCO: up $0.49 to $16.95, Research, Estimates) shared in the gains.
But Xerox (XRX: down $0.05 to $8.09, Research, Estimates) fell after saying its third-quarter loss will be twice as wide as expected.
Compaq Computer (CPQ: up $0.03 to $9.92, Research, Estimates) said it signed a contract with the U.S. Postal Service worth as much as $1 billion to provide computing services.
Despite the day's nervousness, Americans unified behind President Bush have grown more comfortable with the U.S.-led retaliation. Stocks are up since the bombing of targets in Afghanistan began Sunday.
President Bush late Thursday offered to stop the retaliation against the Taliban if they turn over bin Laden.
The "second chance" offer came as Bush repeated an FBI warning about possible new attacks against the United States on targets the bureau didn't identify.
Next week brings the busiest period so far for companies reporting September quarter results, with companies such as IBM, Intel and Citigroup trotting out earnings. Analysts surveyed by earnings tracker First Call expect that overall third-quarter profits tumbled 22.2 percent. 
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