"Subprime is again on the front-burner, with the combination of Bear Stearns and concerns over what other hedge-fund issues might be out there," said Art Hogan, chief market strategist at Jefferies & Co.
The market came under early pressure after reports that investments in two leveraged funds run by Bear Stearns are now nearly worthless, with Federal Reserve Chairman Ben Bernanke telling Congress the situation would likely worsen before getting better.
The Dow Jones Industrial Average shed 107 points to 13,864, as 24 of its 30 components fell. The Dow earlier fell over 140 points to a low of 13,823. On Tuesday, it reached a high of 14,0
"The market was geared for a lower opening after a spate of negative earnings," said Jay Susskind, director of trading at Ryan, Beck & Co.
The S&P 500 fell 12.8 points to 1,536, while Nasdaq Composite lost 32 points to 2,680.
Trading volumes showed 900 million shares exchanging hands on the New York Stock Exchange and 1.2 billion on the Nasdaq. Declining issues topped gainers by 3 to 1 on the NYSE and by 11 to 3 on the Nasdaq.
Intel's stock weighed heavily on blue chips and on the Nasdaq, losing 5.2%. The chip giant's second-quarter earnings were in line with analysts expectations but its profit margins fell short of the company's own targets.
In addition, internet search firm Yahoo fell 5% after cutting its earnings outlook for the year. Meanwhile, International Business Machines , a Dow component and eBay both fell ahead of their earnings after the close.
The influential financial sector of the market came under early pressure after reports that investments in two of Bear Stearns hedge funds -- with heavy exposure to subprime markets -- are nearly worthless.
In addition, credit-ratings agency Moody's put the ratings of 13 tranches of eight deals from Bear Stearns on review for possible downgrade. These deals are mostly backed by Alt-A mortgage loans, which are a step higher in quality from subprime loans.
Following the reports on Bear Stearns, Punk Ziegel & Co. analyst Richard Bove downgraded the top Wall Street firms to sell from market perform, including Goldman Sachs , Lehman Brothers , Merrill Lynch and Morgan Stanley .
He also downgraded the universal banks -- Bank of America , Citigroup Inc. and JP Morgan -- to market perform from buy.
"I do not view this as a Bear Stearns problem but a systemic one," Bove said in a note. "For the past six months I have been writing that this could happen and that the systemic protections against such a development have been removed by the market place."
"This opens investors to sizable losses which, at this moment, simply cannot be calculated," he said.
Among Dow components, Pfizer Inc. dropped 4%. The pharmaceutical firm posted a worse-than-forecast 48% decline in profits.
Altria Group Inc. , which posted a better-than-expected drop in earnings, still fell 1.5%.
And J.P. Morgan Chase , declined 3.7% amid broad weakness among brokerage stocks. The country's third-biggest bank posted a better-than-expected 20% rise in earnings, but also reported tripling its loan loss reserves.
The market also digested congressional testimony from Bernanke, with the release of his written remarks having little immediate impact on trade. "All of that comes down to a predictable statement that he is not going to roil markets, so we may be able to look beyond Bernanke to corporate America," Hogan said.
The market showed little reaction to news that consumer prices icreased a moderate 0.2% in June, a touch higher than the 0.1% expected, with falling energy prices offsetting rising food prices.
Excluding volatile food and energy prices, the core consumer price index also increased 0.2%, in line with expectations.
Sectors, other markets
A rally in crude helped lift the energy sector, which climbed along with multimedia , and semiconductors . Financial and bank stocks led declines.
Treasury prices rose, sending yields lower, with the benchmark 10-year Treasury up 9/32 at 96 01/32, yielding 5.015%.
The dollar was also basically flat against rivals, though earlier it fell to new lows vs. the euro and the British pound.
Crude oil futures rose 18 cents to $74.29 a barrel after unexpected decline in U.S. crude supplies, while gold climbed as high as $674.50, its strongest intraday level since June 7.
By Kate Gibson