NEW YORK (CNN/Money) - Investors worried about a pullback in technology spending sent U.S. stocks lower Friday as a week that began with terror warnings ended with big losses in Sun Microsystems and Applied Materials.

Gains from a stunning mid-month rally have all but faded ahead of a long holiday weekend.

The Nasdaq composite index dropped 36.14 points, or 2.1 percent, to 1,661.49, widening its weekly loss to 4.6 percent. The Dow Jones industrial average lost 111.82, or 1 percent, to 10,104.26, falling 2.4 percent over the past five sessions. The Standard & Poor's 500 index declined 13.26, or 1.2 percent, to 1,083.82, widening its 2002 decline to 5.7 percent.

Nasdaq's second-most actively traded stock, Sun Microsystems (SUNW: down $0.55 to $6.86, Research, Estimates), said customers continue to hold back on buying new technology -- although the top supplier of Unix servers vowed to return to profitability this quarter.

Chip equipment stocks, including industry leader Applied Materials (AMAT: down $1.77 to $23.80, Research, Estimates), also fell. Goldman Sachs downgraded the sector, saying these stocks are risky until signs of improving demand materialize.

New technology spending has dried up over the last two years, frustrating investors banking on recovery. The Nasdaq, home to many tech stocks, is down 14.8 percent on the year following two straight annual declines.

"There's no doubt we are seeing a string of nothing but miserable corporate news," said Jordan Kimmel, president and portfolio manager at Magnet Asset Management, who also linked some of the problems to the week's terror warnings.

Kimmel is buying shares of Noble International (NOBL: Research, Estimates), an auto industry supplier, Neoware Systems (NWRE: Research, Estimates), a software maker, and Traffix (TRFX: Research, Estimates), a database marketing firm -- companies he said are growing sales and improving margins.

More stocks fell than rose in light pre-holiday volume. On the New York Stock Exchange, declining stocks topped advancing 3-to-2 ones as 881 million shares traded. Nasdaq losers beat winners 5-to-3 as 1.2 billion shares changed hands, the slowest trading day of the year.

U.S. markets are closed Monday for Memorial Day.

In other markets, the dollar rose against the yen and was flat versus the euro. Treasury securities ended little changed, while gold backed off recent highs.

Sun shares are now down 89 percent from their all-time high above $64, while Applied Materials stocks is 58 percent below its peak.

Steve Milunovich, who covers Sun for Merrill Lynch, said this is the second straight quarter when the company endured a downturn in orders booked from the previous period.

"Sun is seeing some strength in government and healthcare, but competition -- mostly with IBM -- remains acute," Milunovich told clients.

James Covello, who covers chip equipment stocks for Goldman Sachs, told clients, "We feel more comfortable on the sidelines until a clearer end-demand picture emerges."

In addition to Applied Materials, losses spread to rivals KLA-Tencor (KLAC: down $2.66 to $54.43, Research, Estimates) and Novellus Systems (NVLS: down $1.66 to $46.18, Research, Estimates).

"It's the same old, same old," said David Briggs, head trader at Federated Investments. "Large cap tech is going to be in the doldrums for some time."

Still, Briggs expects stocks to go modestly higher in the months ahead as economic data pointing to a recovery trickles in.

In the latest, new home sales rose to an annual rate of 915,000 in April, the government said, as the housing market continued to show strength. Earlier figures showed that the economy grew at a 5.6 percent pace in the first three months of the year. The figures, weaker than expected, are still the best showing for GDP in more than two years.

Biogen (BGEN: up $9.15 to $49.47, Research, Estimates) rallied. A Food and Drug Administration panel Thursday gave the thumbs up to Amevive, the company's first experimental treatment for the skin disease psoriasis.

The Dow's only significant winner was Home Depot (HD: up $0.52 to $43.42, Research, Estimates). The home improvement retailer pared some of the losses that followed a disappointing outlook made earlier this week.

Investors were unnerved earlier this week by terrorism warnings from Vice President Dick Cheney and New York City officials.

But the next four trading sessions may hold promise. Stocks have gained in 14 of the last 18 post-Memorial Day weeks, according to Briefing.com.