updated 3/12/2004 9:16:50 AM ET 2004-03-12T14:16:50

Stock prices on Wall Street and around the world fell sharply Thursday after a brutal terrorist attack in Spain left more than 190 dead and renewed fears about global uncertainty in the post-9/11 era.

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U.S. stock prices fell at the opening but recovered their losses temporarily as Spanish officials insisted that a series of well-coordinated train bombings were the work of a domestic separatist group. Major European stock markets fell 2 to 3 percent.

Wall Street then tumbled late in the trading day after authorities discovered a van with detonators and an audiotape of Quranic verses near where three of the four bombed trains originated. Later a London-based newspaper reported that a group claimed responsibility for the group in the name of al-Qaida.

Analysts suggested investors fled the market because of concerns that the train bombings signal a new round of large-scale attacks by al-Qaida.

The Dow Jones industrial average ended the day with a loss of 169 points or 1.6 percent, its worst session since last May. It was a fourth straight day of losses that have trimmed more than 4 percent off the blue-chip index.

Broader stock indices also fell 1 percent or more.

Stocks were weak earlier in the day in reaction to the Spanish bombings, but “didn’t react fully until late in the day when al-Qaida apparently took claim for the horrible incident,” said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co.

Even though it was far from certain whether the claim is credible, the growing nervousness about the potential for more terrorist attacks makes equities a riskier investment, he added. Stock market sentiment already had been weakening on concerns about weak job growth that have  undermined consumer confidence, Crescenzi said.

Wall Street have seen a significant pull-back over the previous three trading sessions, as investors have worried that U.S. stock valuations are becoming too high and that a long-forecast correction is now underway. The sell-off has pushed the Dow industrials and the Nasdaq Composite index to new 2004 lows.

Thursday's drop came on the one-year anniversary that some have called the beginning of a new bull market after a nasty three-year downturn. Even after this week's slide, the broad market, as measured by the S&P 500 index, is up 38 percent over the past 12 months.

Two economic reports, released before Thursday’s open, were upbeat, signaling U.S. retail sales are increasing and layoffs are continuing to subside.

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The Commerce Department reported a 0.6 percent rise in sales at the nation’s retailers in February, matching economists’ expectations. The gains, which were boosted by a 2.7 percent jump in auto sales, were seen as a hopeful sign for growth in the current quarter. Consumer spending represents two-thirds of all economic activity.

Separately, the Labor Department reported new claims for unemployment benefits dropped last week by a seasonally adjusted 6,000 to 341,000, beating forecasts that the number would hold steady.

Although the pace of layoffs is slowing, companies don’t seem to be in a hurry to hire new workers, which has concerned economists. If the lackluster trend continues, consumers may become more cautious and rein in their spending, analysts say.

Stocks were boosted, albeit temporarily, by Federal Reserve Chairman Alan Greenspan, who told a congressional committee he is confident employment will increase as the economic recovery continues. The Fed chief said the answer to the nation’s job worries lies in expanded educational opportunities, not protectionist trade barriers.

Many Wall Street analysts say a sector rotation is at work in the stock market, with investors shifting money from the market’s recent leaders, most notably the technology sector, and into more reliable, defensive areas of the market, like consumer stocks.

But some market professionals like Francis Gannon, a portfolio manager at AIG SunAmerica Asset Management, remain bullish about the outlook for equities. Gannon told CNBC Thursday that there is currently a “disconnect” between the stock market and the economy in general, which he thinks is improving.

“Investors are getting too defensive, too quickly,” Gannon said. “I think the economy will generally be fine and earnings will be fine,” he added. “The market is just lacking any type of stimulus to move it higher.”

Shares of Nortel Networks fell 7.4 percent to $6.37 after saying it would have to delay filing its annual report because it must further restate results for 2003. The announcement, based on the findings of an independent review by the telecom company’s audit committee, comes three months after Nortel restated earnings going back to 2000 because of improper accounting.

Target rose 7.1 percent to $44.70 after the discounter said it was considering selling its Mervyn’s and Marshall Field’s divisions. Several brokerage analysts issued upgrades on the news.

J.C. Penney closed flat at $31.91 after published reports said it may split up its Eckerd drugstore chain and is in talks with rival drug chain CVS.

Reuters and The Associated Press contributed to this report.

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