NEW YORK (CNN/Money) - Stocks closed sharply lower Tuesday as investors expressed disappointment after the Federal Reserve acknowledged the recent downturn in the economy but nonetheless opted to keep a key interest rate unchanged at 1.75 percent.

Stocks in the financial and aviation sectors were among the biggest decliners.

The Nasdaq composite fell 37.56, or almost 2.9 percent, to 1,269.28. The Dow Jones industrial average lost 206.50, or about 2.4 percent, to 8,482.39. The Standard & Poor's 500 index lost 19.59, or about 2.2 percent, to end the day at 884.21.

"It's such a knee-jerk reaction. I don't think that what the Fed said justifies the kind of reaction we saw. I would like to think that we could rally back after the certification is completed tomorrow, but I don't know. I am just stunned by the extent of this decline. Hopefully, it was a one-time reaction," said Donald Selkin, director of research at Joseph Stevens.

The Fed left its target for the federal funds rate -- an overnight bank lending rate -- unchanged at a 40-year low of 1.75 percent, as was generally expected, but changed its bias from a "neutral" stance -- which means the risks of both inflation and economic weakness are balanced -- to one that acknowledges weakness.

"We got the worst possible scenario today: no rate cut, but confirmation that there is weakness," Tim Smalls, an equity strategist at SG Cowen, told CNNfn's Street Sweep. "However, I don't think anyone should be surprised by this."

Of the 22 companies that deal directly with the Fed, 21 predicted no rate cut.

After the bell, chip-equipment maker Applied Materials (AMAT: down $0.12 to $13.46, Research, Estimates) reported earnings per share of 7 cents, 2 cents better than expected and flat with results in the same period a year earlier.

Storage maker Brocade Communications (BRCD: down $0.58 to $14.17, Research, Estimates) and business software maker BEA Systems (BEAS: down $0.50 to $5.15, Research, Estimates) are among the companies due to report quarterly results on Wednesday.

Wednesday is also the deadline for about 700 companies to certify their recent financial statements with the Securities and Exchange Commission, and there is some fear about the possibility of restatements. So far, 249 companies have certified their results, according to the commission's Web site checklist.

Treasury prices rallied on the Fed's decision, pushing the 10-year note yield down to 4.08 percent, a level not seen since November 1963. The dollar was a little weaker versus the euro and the yen.

Light oil futures gained 4 cents to $27.19 a barrel, while gold rose modestly.

Market breadth was negative. On the New York Stock Exchange, decliners beat advancers by more than 2-to-1 as 1.27 billion shares traded. On the Nasdaq, losers beat winners by more than 2-to-1 as 1.53 billion shares changed hands.

In its accompanying statement, the Fed acknowledged the recent economic weakness, noting that "the softening in the growth of aggregate demand that emerged this spring has been prolonged in large measure by weakness in financial markets and heightened uncertainty related to problems in corporate reporting and governance."

However, it said, "The current accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, should be sufficient to foster an improving business climate over time."

Finally, in choosing to change the bias, the Fed noted that "for the foreseeable future ... the risks are weighted mainly toward conditions that may generate economic weakness."

"The statement wasn't that negative, but it was a bit clumsily worded," said Joseph Stevens' Selkin. "They reminded people of the dangers."

"The Fed wants to see whether this July data, this bad economic data, was an aberration, and two months will make it clearer," Diane Swonk, chief economist at Bank One, told CNNfn's The Money Gang. "If they see more instability in financial markets, they will take it lower."

In other economic news, the July reading on retail sales from the Department of Commerce came in generally in line with estimates. The index rose 1.2 percent versus a revised 1.4 percent gain in June, as expected. Excluding the volatile auto sales, the index rose 0.2 percent compared with a revised 0.5 percent gain the previous month. Economists surveyed by Briefing.com were expecting a rise of 0.3 percent.

Also Tuesday, President Bush held a forum in Waco, Texas, to discuss the current state of the economy and what can be done to help build it up. Participants included cabinet members and a select group of small business owners and corporate executives. But attempts at soothing fears were largely ignored by a Fed-focused market.

The recent slate of bad news in the airline sector had a big impact on the aerospace and defense companies on the Dow -- the companies that make planes, engines and parts -- pushing Boeing (BA: down $3.27 to $37.23, Research, Estimates), United Technologies (UTX: down $5.98 to $62.47, Research, Estimates) and Honeywell International (HON: down $2.44 to $30.20, Research, Estimates) lower.

Airline stocks were mixed in the wake of Sunday's bankruptcy filing from US Airways Group (U: Research, Estimates), although the company's shares have not opened for trade.

Shares of UAL (UAL: down $1.06 to $2.74, Research, Estimates), the parent of United Airlines, remained under pressure on speculation that the company might be the next to file for bankruptcy protection. UBS Warburg downgraded the shares to "sell" from "buy" and cut its 12-month price target to $1.50 from $20, citing concerns that the company could file for bankruptcy within the next six months.

However, AMR (AMR: up $0.38 to $8.74, Research, Estimates), the parent of American Airlines, traded higher after it said it will cut 7,000 jobs and reduce its fleet as part of a restructuring.

In other corporate news, a group of U.S. financial companies, including Citigroup (C: down $0.98 to $33.10, Research, Estimates) and Bank of America (BAC: down $1.09 to $67.36, Research, Estimates), said its 18 publicly traded companies would begin expensing stock options. But the news did little to boost the banking sector, which sold off heavily after the Fed decision.

On an upbeat note, shares of Wal-Mart Stores (WMT: up $0.30 to $48.71, Research, Estimates) rose after the world's No. 1 retailer reported second-quarter earnings per share of 46 cents, a penny better than estimates and an improvement on the 37 cents per share earned in the year-earlier period. The company also raised its third-quarter profit forecast.

In technology, Intel (INTC: down $0.83 to $16.70, Research, Estimates), the No. 1 chipmaker, said it will launch a new process for making the world's smallest computer chips in large-scale production manufacturing, setting itself ahead of rivals.

Meanwhile, chip-equipment maker Kulicke & Soffa (KLIC: down $1.25 to $4.01, Research, Estimates) warned that fiscal fourth-quarter revenue will fall below previous forecasts due to slow demand for electronics.