NEW YORK (CNN/Money) - Heightened concerns over the state of the economy and pessimistic forecasts for Intel and Citigroup caused a brutal hemorrhage on Wall Street Tuesday that bled blue-chip and tech stocks across the board.

But some market watchers offered an optimistic viewpoint.

”I think we've seen the lows and we're steadily going to build momentum for a stronger market,” Joseph Battipaglia, chief investment officer with Ryan, Beck & Co., told CNNfn's Street Sweep. “Clearly, it’s all about the economy. The consumers are doing their part . Now the business side has to come along, too. That’s why today’s soft ISM number was so disappointing.”

A weaker-than-expected Institute for Supply Management report on manufacturing punctuated the day's gloom, coming in below forecasts to indicate continued sluggishness in the nation's manufacturing activity.

The ISM's index -- a closely watched indicator -- came in at 50.5 for August, below expectations but holding above the key mark of 50. A level of 50 indicates expansion in manufacturing activity.

The market turmoil also depressed the dollar to its weakest level against the euro in more than a month and to a near three-week low versus the yen.

Investors lost confidence in tech stocks after Lehman Brothers said chip leader Intel was likely to lower its third-quarter revenue guidance. The Dow blue chips were knocked down in a domino effect, triggered by a downgrade to “sell” for Citigroup.

The Dow Jones industrials average lost 355.45, or 4 percent, to 8,308.05, a session low and the second-biggest one-day decline for the year. This year's biggest one-day drop, 390.23 points, occurred on July 19. The Nasdaq composite lost 51.01, or 3.9 percent, to 1,263.84. The Standard & Poor's 500 index dropped 38.05, or 4 percent, to 878.02.

“The rally over the past five weeks needed confirmation in the data that the economy is coming along. As long as that data remain inconclusive, the market will be dominated by sellers,” Battipaglia added.

On the economic docket for Wednesday, investors get a reading on construction spending for the month of July. Economists forecast a moderate slip of 0.5 percent. Meanwhile, chipmaker National Semiconductor (NSM: down $1.02 to $14.97, Research, Estimates) dominates the earnings agenda, expected to post its first-quarter results after the close.

Reminding investors of last week's tech turmoil, Lehman Brothers said it expects No. 1 chipmaker Intel (INTC: down $0.81 to $15.86, Research, Estimates) to lower revenue guidance at the company's mid-quarter update scheduled for Thursday. Lehman analyst Dan Niles said in a morning research note that the chipmaker continues to struggle with sluggish demand and a lack of future orders.

The latest brokerage report on Intel came a week after the company made cautious comments about its third-quarter growth and the overall global computing environment.

Other chip stocks -- including Advanced Micro Devices (AMD: down $0.59 to $8.26, Research, Estimates), Applied Materials (AMAT: down $0.37 to $12.99, Research, Estimates), Analog Devices (ADI: down $1.27 to $22.83, Research, Estimates), Maxim Integrated (MXIM: down $1.70 to $29.91, Research, Estimates) and Novellus Systems (NVLS: down $1.51 to $22.95, Research, Estimates) -- shed value.

But the latest sales data from the Semiconductor Industry Association (SIA) offered a spark of good cheer for the beleaguered sector. Global chip sales grew 2.9 percent in July over June, while third-quarter semiconductor industry growth is on track for a 7 percent to 9 percent sequential increase, according to the industry group's forecast.

Telecoms, semiconductor equipment makers, Internet and networking stocks weren't spared in the broad-based selloff on the Nasdaq.

Computer maker IBM (IBM: down $3.03 to $72.35, Research, Estimates) is pondering cutting 4,000 jobs, or 5 percent of the combined consulting work force, as it completes its $3.5 billion purchase of PricewaterhouseCoopers LLC's consulting arm, the Wall Street Journal reported Tuesday. IBM's acquisition is scheduled to close around Sept. 30. IBM declined comment.

SoundView Technology cut its stock price target on Internet firm Yahoo! (YHOO: down $0.58 to $9.71, Research, Estimates) and scaled back its 2003 earnings estimate, citing a more modest growth forecast.

The blue-chip woes grew with a downgrade of financial services firm Citigroup (C: down $3.36 to $29.39, Research, Estimates), the most active stock on the New York Stock Exchange.

Prudential Securities cut its rating to "sell" from "hold" and lowered its 2002 and 2003 estimates, saying it believes the company could miss its earnings expectations amid concerns over ongoing corporate governance issues and weakness in capital markets.

In related news, CNNfn confirmed that New York Attorney General Eliot Spitzer has widened his investigation of Citigroup's securities division, Salomon Smith Barney. Citigroup is already under investigation by Congress for its role in the collapse of energy firm Enron and telecom firm WorldCom.

Financial issues J.P. Morgan (JPM: down $1.65 to $24.75, Research, Estimates) and American Express (AXP: down $2.72 to $33.34, Research, Estimates) struggled on the heels of Citigroup's downgrade. Morgan Stanley cut its 2002 and 2003 estimates for investment firm Goldman Sachs (GS: down $3.55 to $73.75, Research, Estimates), citing lower revenue expectations for mergers and acquisitions, equity trading, and its asset management businesses.

Automaker Ford Motor (F: down $0.83 to $10.94, Research, Estimates) fell victim to a UBS Warburg downgrade. The brokerage house downgraded the stock to "reduce" from "hold," citing continued weakness in operations and the threat of a credit rating downgrade.

Dow component Home Depot (HD: down $1.07 to $31.86, Research, Estimates) received a positive mention in the latest Barron's. The home-improvement chain appeared on the publication's list of high-quality companies with high debt ratings and sound earnings. Home Depot shares, however, failed to buck the general downtrend.

"Today's sharp selloff shows that there were more bears on vacation in August than we thought, and they've come back nasty," said Ned Riley, chief investment strategist with State Street Global Advisors.

Riley said concerns over Iraq were also a factor at play in the overall negative market sentiment.

"Aside from the economic concerns, on the geopolitical front there's a little Iraq hangover from last week," Riley said.

Iraqi Deputy Prime Minister Tariq Aziz said Tuesday that Baghdad is ready to work with the United Nations over the return of weapons inspectors in an effort to defuse the tension between Iraq and the United States.

The two major indexes start lower in September -- seen typically as a hostile trading month for stocks -- after coming up losers for both last week and all of August.

"September is almost axiomatic," Jim Waggoner, chief market strategist with Pace Capital Management, told CNNfn's CNNmoney Morning. "The psychology coming into September is very negative. But that sentiment is predicated upon the big rally in late July going into August. Now we're seeing a natural pullback, which is expected."

The first month of the fall season also marks the anniversary of Sept. 11.

"Nervousness is building ahead of the one-year anniversary of Sept. 11, and it's bound to continue until we get that date behind us," said Art Hogan, chief market analyst with Jefferies & Co.

Asian-Pacific stocks finished lower, with Tokyo's Nikkei index plunging to a near 19-year low led by a selloff in banking stocks. European markets closed lower after tracking weakness in Japanese stocks.

Treasury prices rallied sharply, pushing the 10-year note yield down to 3.96 percent. The dollar fell against the yen and euro. Light crude oil futures dropped $1.19 to $27.79 a barrel in U.S. trading. Gold price rose $1.10 to $315 a troy ounce in U.S. trading, benefiting from some safe-haven buying.

Market breadth was negative. On the New York Stock Exchange, decliners beat advancers 3-to-1 as 1.2 billion shares traded. On the Nasdaq, losers topped winners 3-to-1 as 1.3 billion shares changed hands.