NEW YORK (CNN/Money) - Stock prices tumbled in a broad selloff Wednesday as accounting scandals and poor prospects for earnings growth drove the S&P 500 and the Nasdaq composite to their lowest levels since 1997.

The pronounced, broad-based selling took a severe toll on investor confidence, which has been shattered by months of corporate scandals that came on top of last year's terrorist attacks.

"This market has completely broken the spirit of investors," said Al Mirman, strategist at V Finance in Sarasota, Fla. "It is going to take a good year for investors' confidence to be reinstated."

The Dow Jones industrial average tumbled 282.59 to 8,813.50, a 3.1 percent drop that left the world's most widely watched stock index at its lowest close in more than nine months. The Nasdaq composite lost 35.11 to 1,346.01, the lowest close for the tech-laden index since May 19, 1997.

The Standard & Poor's 500 index sank 32.36, or 3.4 percent, to 920.47, its lowest close since November 1997.

A criminal investigation of Qwest Communications, downgrades of General Motors and Ford, and a reshuffling of the Standard & Poor's 500 all added fuel to Wednesday's selloff, the third straight session of heavy selling.

Market analysts said the selling does not necessarily mean that stocks are near a bottom, though many investors have been searching for just that for some weeks now.

"It was a difficult day. It started out difficult and then it just progressed," Kenneth Polcari, managing director at Polcari/Weicker, told CNNfn's Street Sweep. "We broke through key levels [for the major indexes] and that just bodes for more downward pressure."

Of the 30 issues that make up the Dow industrials, 28 closed lower Wednesday. McDonald's (MCD: Research, Estimates) and Microsoft (MSFT: Research, Estimates) were the lone gainers.

After the close of trading, Web search engine Yahoo! (YHOO: Research, Estimates) reported earnings of $21 million, or 3 cents a share, for the second quarter, a penny a share better than Wall Street forecasts. It was the first quarter in seven that the company reported a profit.

In addition, Genentech (DNA: Research, Estimates) reported second-quarter earnings of 23 cents a share excluding one-time items, also a penny above forecasts for the biotechnology company.

Shares of Dow component Johnson & Johnson (JNJ: Research, Estimates) fell after a consumer coalition filed suit against its McNeil unit, the maker of the Imodium anti-diarrhea drug, accusing the company of manipulating patent law to hold up a cheaper generic version.

Merck (MRK: Research, Estimates) continued to trade lower after Tuesday's delay of the initial public offering of its Medco prescription benefits unit and Monday's disclosure that the drugmaker recorded $14 billion in revenue since 1999 that it never actually collected.

General Motors (GM: Research, Estimates) fell after Banc of America downgraded the automaker, along with rival Ford Motor (F: Research, Estimates), to "market perform" from "buy," saying that the two companies will have to match DaimlerChrysler's (DCX: Research, Estimates) new warranty.

In other corporate news, telecom service provider Qwest Communications (Q: Research, Estimates), already being scrutinized for potential accounting discrepancies, said Wednesday that it has been notified of a criminal probe by the U.S. Attorney's office.

"There's still tremendous fear about corporate fraud, global terrorism and other jitters," said Tom Shrader, head of listed trading at Legg Mason. "At some point people are going to perceive that this is as bad as it gets, and that's when you'll find the capitulation everyone's talking about."

The Nasdaq composite was also down sharply.

Semiconductor companies Intel (INTC: Research, Estimates) and Applied Materials (AMAT: Research, Estimates) fell partly in response to a bearish sector note out of Credit Suisse First Boston. Amgen (AMGN: Research, Estimates) led the list of biotechs falling in heavy trading.

On a positive note, Merrill Lynch upgraded networking company Cisco Systems (CSCO: Research, Estimates) to "strong buy" from "buy," saying that fundamentals are looking better and leading indicators show that new orders for communications equipment should see a recovery in the second half of 2002. The firm also upgraded Extreme Networks (EXTR: Research, Estimates).

Another key factor in Wednesday's market: a big reshuffling of the S&P 500 index. S&P said late Tuesday that it will replace seven companies based outside the United States with companies based within the country. The move should make the S&P 500 a better representation of U.S. large-capitalization stocks, the financial information company said.

Reshuffling of indexes creates volatility, as managers of funds based on the index need to buy the new issues being added and sell those being removed. While the reshuffling does not take place until July 19, its impact will be felt in the sessions leading up to the date, as managers lay the groundwork for these transitions.

The seven stocks entering the index are: Goldman Sachs (GS: Research, Estimates), United Parcel Service (UPS: Research, Estimates), Principal Financial (PFG: Research, Estimates), Prudential Financial (PRU: Research, Estimates), eBay (EBAY: Research, Estimates), Electronic Arts (ERTS: Research, Estimates) and Sungard Data Systems (SDS: Research, Estimates).

The seven being removed are: Royal Dutch Petroleum (RD: Research, Estimates), Unilever (UN: Research, Estimates), Nortel Networks (NT: Research, Estimates), Alcan (AL: Research, Estimates), Barrick Gold (ABX: Research, Estimates), Placer Dome (PDG: Research, Estimates) and Inco (N: Research, Estimates).

In the day's main economic news, the government's May report on wholesale inventories showed a 0.1 percent rise rather than the 0.2 percent decline economists were expecting.

Treasury prices rose, with the yield on the 10-year note at 4.61 percent. Light oil futures rose 68 cents to $26.77 a barrel. Gold and silver prices both declined in U.S. trading.

In global trade, European markets fell and Asian-Pacific stocks finished lower Wednesday. The dollar was stronger versus the euro and weaker versus the yen.

Market breadth was negative. On the New York Stock Exchange, decliners topped advancers by 3-to-1 as 1.77 billion shares changed hands. On the Nasdaq, losers topped winners by more than 2-to-1 as 1.81 billion shares traded.

A number of key quarterly profit reports are due out Thursday.

Dow component and diversified manufacturer General Electric (GE: Research, Estimates) is expected to report earnings per share of 44 cents, 12 percent better than the 39 cents earned one year earlier.

Juniper Networks (JNPR: Research, Estimates), a provider of communications equipment for telecoms, is expected to show a loss of a penny, down 111 percent from the 9 cents earned one year earlier. Chipmaker Rambus (RMBS: Research, Estimates) is expected to have earned 6 cents per share, a 49 percent improvement over the 4 cents it earned one year earlier.

In addition, the U.S. Department of Labor releases its Producer Price Index, a measure of the price of goods at the wholesale level. The June PPI is expected to be flat, after falling 0.4 percent the previous month. Stripping out the often volatile food and energy components, the index is expected to show a rise to 0.1 percent from a unchanged reading the previous month.