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Dow Drops 200 Points

The Dow Jones average of industrial stocks dropped 206 points, or 2.4 percent, to 8,482, according to preliminary calculations.

Stocks extended losses as investors fretted about the outlook for the U.S. economy after the Federal Reserve left interest rates unchanged at 40-year lows and warned the risks for the economy have tilted toward weakness.

Some on Wall Street were disappointed the Fed did not cut rates to help underpin the economy and avoid a double-dip recession, two periods of recession separated by a brief upturn. Others were worried the Fed's comments pointed to a soft economic recovery.

"People are concerned about the next couple of quarters, so they're shifting some money back into the bond market," said Matthew Ruane, head of listed trading for Gerard Klauer Mattison. "There's uncertainty about the economy. That's the major theme."

Treasuries rallied after the Fed's decision, but the Dow Jones industrial average was down 163.37 points, or 1.88 percent, at 8,525.52. Broader stock indicators also declined. The Standard & Poor's 500 index was down 6.07, or 0.7 percent, at 897.73, and the Nasdaq composite index was down 13.39, or 1 percent, at 1,293.45.

The Federal Reserve kept its key fed funds rate -- the overnight bank lending rate -- steady at 1.75 percent, but changed its view to acknowledge risks to the world's largest economy are now tilted toward weakness rather than evenly balanced between weakness and inflation.

Some investors had bet the Fed would lower rates again, and they sold as the decision to leave rates unchanged was announced. Optimism that the Fed might lower rates contributed to the market's big rally last week, although much of those hopes faded over the weekend.

Analysts said the Fed decision could cause a limited, short-term pullback in stocks as investors questioned the direction of the market.

"Reasons (to buy) at the bottom are never obvious," said Subodh Kumar, chief investment strategist for CIBC World Markets. "Some of those people who were more trading oriented, who were hoping or thinking there might be a rate cut, might move the market lower, but I don't think it will stay that way."

Kumar said stocks could stabilize and rise as scandal-wary investors begin showing more confidence in the veracity of financial results offered by companies, and as companies report earnings that point to a recovery.

A report Tuesday by the Commerce Department did little to stir the market. The goverment said sales at the nation's retailers rose 1.2 percent in July, but most of the gains were the result of strong auto sales.

Investors were also keeping their eyes on the approaching deadline Wednesday set by the Securities and Exchange Commission for companies to certify their financial reports. Analysts say that if many companies miss the deadline, that could further undermine investor faith and prompt stock sales.

Gainers included Wal-Mart, up $1.01 at $49.42 after the nation's largest retailer reported a 26 percent rise in its second-quarter earnings.

AMR, the parent company of American Airlines, rose 58 cents to $8.94. The airline said Tuesday it will eliminate 7,000 jobs and take other cost-cutting moves.

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