NEW YORK (CNN/Money) - Biotech and technology weighed on the Nasdaq composite, knocking stocks sharply lower Monday afternoon, while losses in Merck and other blue chips overshadowed 3M's improved forecast among Dow Jones industrial average issues.

The Nasdaq composite index lost 59.41, or 4 percent, to 1,403.80, dropping below its post-Sept. 11 closing lows to its lowest finish since 1997. The Dow Jones industrial average lost 133.47 to 9,109.79. The Standard & Poor's 500 index fell 21.17 to 968.64.

"You have a number of issues, not the least of which is the upcoming [Fourth of July] holiday," said Michelle Clayman, chief investment officer at New Amsterdam Partners.

Fireworks came early in shares of WorldCom, which reopened for the first time since accounting irregularities at the company surfaced Tuesday evening. The troubled telecom slipped 93 percent to 6 cents on Nasdaq with 1.46 billion shares changing hands -- a U.S. stock market record.

"WorldCom (WCOME: Research, Estimates) selling off is no surprise, but it's certainly adding to the sentiment, and the drug companies are having problems as well," Clayman said. "And because it's such a low liquidity week and a lot of people are on vacation already, you're unfortunately going to see more of the same as the week goes on."

Worries over terrorism may have left many investors unwilling to hold shares going into the weekend, said Jim Volk, co-director of institutional trading at D.A. Davidson. The result is that the market is quick to shrug off good news, like Monday morning's good news on the nation's manufacturers from the Institute of Supply Management, which reported that the manufacturing economy expanded for the fifth month in a row.

"Unless there's some catalyst for the shorts to start scampering there's no reason for markets to go higher," said Volk.

Dow component and health-care products maker Johnson & Johnson (JNJ: down $1.76 to $50.50, Research, Estimates) and its partner Alkermes (ALKS: down $10.86 to $5.15, Research, Estimates) set off the biotech blues after receiving a rejection letter from the U.S. Food and Drug Administration on their bid to market a long-acting, injectable version of their schizophrenia treatment, Risperdal.

Amgen (AMGN: down $3.52 to $38.36, Research, Estimates) and Immunex (IMNX: down $1.37 to $20.97, Research, Estimates), Nasdaq's biotech leaders, fell sharply in the wake of the rejection announcement.

Treasury prices fell, pushing the 10-year note yield up to 4.78 percent. The dollar edged higher against the euro and the yen.

Light crude oil futures fell 6 cents to $26.81 a barrel. Gold rose modestly.

Market breadth was negative. On the New York Stock Exchange, decliners topped advancers by nearly 2-to-1 as 1.4 billion shares changed hands. Nasdaq losers also beat winners by a nearly 2-to-1 margin on extremely high volume of 3 billion shares traded, more than half of which were WorldCom.

WorldCom (which the Nasdaq plans to delist at week's end) made for more than half of the trading on the Nasdaq, but the pain extended beyond the beleaguered company.

Techs tumbled with a focus on chips after J.P. Morgan downgraded semiconductor-equipment makers Altera (ALTR: down $0.88 to $12.72, Research, Estimates) and Xilinx (XLNX: down $1.75 to $20.68, Research, Estimates), cutting 2002 and 2003 sales estimates.

"What we're seeing with tech is consistent with the last few weeks and before. There's a lot of red out there and it doesn't seem to be any one sector in particular," said Walter Winnitzki, a technology analyst at First Albany.

Countering the tech selling, shares of telecom Ericsson (ERICY: up $0.12 to $1.56, Research, Estimates) gained on rumors of a potential takeover.

"The general tech market has recalibrated their investment view that there's going to be very little tech recovery, very little pick-up in IT (information technology) spending in 2002; they're putting it off until at least 2003," Winnitzki said. "So people figure, why buy these companies now?"

On a positive note, Dow component 3M (MMM: up $4.40 to $127.40, Research, Estimates) raised its forecast for its second quarter, saying it expects to see earnings per share of at least $1.33; analysts have been expecting profit of $1.25 a share.

But pharmaceutical company and Dow component Merck (MRK: down $1.89 to $48.75, Research, Estimates) fell after it announced a delay in the $1 billion initial public offering of its Medco Health Solutions unit until July 8 due to weak demand.

In one of the largest corporate deals in the defense industry, contractor Northrop Grumman (NOC: down $6.81 to $118.19, Research, Estimates) agreed to buy conglomerate TRW (TRW: down $0.40 to $56.58, Research, Estimates) for about $7.8 billion after protracted negotiations.

As noted above, the Institute for Supply Management said its index of manufacturing activity in June rose to 56.5 from a reading of 55.7 in May; economists surveyed by Briefing.com were expecting a dip to 55.5. Any reading above 50 signifies expansion in the sector.

Also, the government said construction spending declined 0.7 percent in May compared with a revised gain of 0.4 percent in April. Economists were expecting an increase of 0.2 percent.

The outlook for stocks isn't especially bright. Merrill Lynch chief U.S. strategist Rich Bernstein said in a before-hours note that he has lowered his 12-month target on the S&P 500 index to 1,050 from 1,200, saying his indicators do not support the 20 percent or more expected gain his old target suggested.

"Our indicators are not even close to suggesting such lofty returns," Bernstein wrote. Among a laundry list of reasons for cutting his target, Bernstein highlighted an expectation that bonds will continue to outperform stocks and a high level of bullishness -- never a good sign -- among his counterparts on Wall Street.

Still, some have found reason for (muted) cheer.

"We're looking at the first day of the rest of the year and it's looking like more of the same," said Douglas Altabef, managing director at Matrix Asset Advisors. "On an up note, there is more discussion that maybe we have worked through some of the intense negativity of late and that the disconnect between the economic data and market action may end soon."