NEW YORK (CNN/Money) - U.S. stocks took a beating Thursday as investors reacted to a downgrade of chip leader Intel, weakness in wireless and biotech, and continued worries about global tensions.

Chipmakers, wireless, biotech and networking stocks brewed up a strong tech retreat. Adding insult to injury was Dow component Merck, down on a brokerage note.

The Nasdaq composite index lost 40.38, or 2.53 percent, to close at 1,554.88, its lowest close since October 2001. The Dow Jones industrial average slipped 172.16, or 1.76 percent, to close at 9,624.64, its lowest close in four months. The Standard & Poor's 500 index lost 20.75, or 1.98 percent, to close at 1,029.15.

After the close of trade, No. 1 chipmaker and Dow component Intel offered a weaker-than-expected mid-quarter update, saying it expects revenue in its fiscal second quarter to be in a $6.2 billion-to-$6.5 billion range, below the $6.4 billion-to-$7.0 billion range it had targeted at the beginning of the quarter. Shares of Intel fell $2.50 to $24.50 in after-hours trade.

"The after-hours number (on Intel) is not good for tomorrow," Kenneth Polcari, managing director of Polcari/Weicker, told CNNfn's Street Sweep. "There was a lot of trepidation today (Thursday). As the day wore on, things got uglier, but the sense is it's nearing that bottom, it's gonna flush it out -- it has to do that (before markets can go higher).

Earlier in the day, techs were hurt after Merrill Lynch downgraded Intel (INTC: down $1.18 to $27.00, Research, Estimates) ahead of the update. The firm cut its intermediate-term rating to "neutral" from "strong buy," citing a lack of visibility for the company's products in the personal computer market.

Merrill also downgraded a number of other chipmakers, including Texas Instruments (TXN: down $0.75 to $27.69, Research, Estimates), which was cut to "neutral" from "buy."

Joe Osha, the Merrill analyst who downgraded the stocks, told CNNfn's Market Call he sees evidence of a second-half recovery for the chip sector, but the question is "do the earnings multiples make sense?"

Osha added, "The earnings will go up, but not enough to merit these valuations."

In addition, Prudential said that label changes to Merck's (MRK: down $1.75 to $53.20, Research, Estimates) cholesterol-lowering drug Zocor could put the drug at a disadvantage competitively. These changes add another source of negative bias to Merck's earnings-per-share potential.

"We're really in a state right now that if there's any bad report, that's enough (to pull markets down)," said Charles Payne, CEO and chief analyst at Wall Street Strategies. "It's not even a reflection of the individual company or brokerage firm -- if there are question marks, the first response of investors is to get out of the way."

On Friday, the government releases its report on monthly unemployment. The rate is expected to rise to 6.1 percent in May from 6 percent in April, according to a consensus of economists surveyed by Briefing.com. Separately, businesses are expected to have added 75,000 jobs to their payrolls last month after adding 43,000 in April.

Investors largely shrugged off an economic report that showed the number of Americans filing new claims for unemployment fell below 400,000 last week for the first time since March, declining to 383,000 in the week ended June 1 from a revised 415,000 the prior week.

David Briggs, head of equity trading at Federated Investors, said the report was overshadowed by persisting concerns about international tension.

Earlier Thursday, Israeli forces stormed Yasser Arafat's compound, withdrawing hours later. In addition, tension still exists between nuclear powers India and Pakistan.

The domestic terrorism issue also was in the picture. Congress was holding hearings about possible intelligence failings in the Sept. 11 attack on New York and Washington, as well as indications that President Bush will announce a new Cabinet level department of homeland security in a nationally televised address Thursday night.

"I think there was some nervousness today about what Bush might say tonight," said Polcari/Weicker's Kenneth Polcari.

"It's a reminder of the old angst (of international conflict), despite a good jobless report," Briggs said. "People seem to be ignoring the economic numbers right now."

Along with semiconductor stocks, other tech sectors struggled throughout the day.

A number of analysts downgraded Airgate PCS (PCSA: down $5.65 to $2.75, Research, Estimates), a regional telecom provider with connections to Sprint, after it said it sees a decline in the number of subscribers in its third quarter. The news put pressure on the wireless sector.

Riverstone Networks (RSTN: down $0.69 to $2.61, Research, Estimates), which said late Wednesday it expects its first-quarter loss to widen sharply, fell sharply. Other networking stocks such as Juniper Networks (JNPR: down $0.37 to $8.41, Research, Estimates) and Cisco Systems (CSCO: down $0.46 to $15.46, Research, Estimates) followed suit.

Health-care losses extended to the biotech sector, with stocks down across the board. Bellwether Amgen (AMGN: down $2.72 to $42.79, Research, Estimates) fell after a British company announced positive test results for a drug that could compete with Amgen's anemia treatment.

Shares of Oracle (ORCL: down $0.51 to $8.15, Research, Estimates) declined one day after CEO Larry Ellison said the business software maker should be able to make fiscal fourth-quarter forecasts, triggering a late-day tech rally. A report from UBS Warburg said the company should meet expectations, but through aggressive cost cutting.

Treasurys closed higher, with the yield on the 10-year note sliding to 5.01 percent. In global trade, European stock markets ended mixed, while Asian markets closed lower. The dollar was weaker versus the euro and a little stronger against the yen.

Light crude oil futures rose 4 cents to $24.79 a barrel in New York. The price of gold rose $3.70 to $325.80 an ounce.

Market breadth was negative. On the New York Stock Exchange, losers topped winners by nearly 11-to-5 as 1.56 billion shares changed hands. On the Nasdaq, decliners beat advancers by almost 5-to-2 as nearly 1.57 billion shares traded.