updated 3/16/2004 8:14:25 AM ET 2004-03-16T13:14:25

Growing evidence that the al-Qaida terrorist network may have been involved in the Madrid bombings last week weighed heavily on U.S. stock indices Monday, driving the blue-chip Dow Jones industrial average down 137 points to a fresh 2004 low.

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U.S. stocks followed European bourses lower in the early going and accelerated their losses in the last hour of trading, adding to their sharp losses late last week after al-Qaida emerged as a possible perpetrator of the deadly train bombings in Spain on Thursday morning that has left at least 200 people dead and hundreds more injured.

A videotaped message left in a trash can near a mosque in Madrid over the weekend said al-Qaida carried out the attacks in retaliation for Spain's support for the U.S.-led war against Iraq. The message warned of more bloodshed. Al-Qaida is the terrorist group responsible for the Sept. 11, 2001, attacks against the United States.

Spanish voters ousted their country’s ruling Popular Party in national elections on Sunday, with many saying they were furious with their government for backing the Iraq war and making their country a target for terrorism.

The train bombings in Spain and the sudden shift in government there made some investors nervous about the American coalition in Iraq and the specter of more terrorism, analysts said. Spain’s incoming leader, Jose Luis Rodriguez Zapatero, said Monday he plans to pull the nation’s troops out of Iraq, a move that represents a major swing from his predecessor's pro-American foreign policy.

“The Spain elections certainly have some ramifications on the war on terror, and the political implications aren’t great for the United States,” said Jay Suskind, head trader at Ryan Beck & Co.

Suskind noted that there wasn’t a lot of confidence in buying on Wall Street’s trading desks Monday, given the concern over the political ramifications of the events in Spain and last week’s poor stock market performance. Wall Street has closed at its lows in four out of the last six trading sessions and its main stock indices are now in negative territory for 2004.

The Dow finished Monday down 137.19 points, or 1.3 percent, erasing gains made in Friday’s rally. Broader indices also slumped, with the Standard & Poor's 500-stock index finishing Monday off 16.08 points, or 1.4 percent, while the technology-laced Nasdaq Composite index closed down 45.53 points, or 2.3 percent.

Intelligence of a probable al-Qaida connection to the Madrid bombings weighed heavily on European bourses too, dragging them to their lowest levels of 2004. Spain’s IBEX index closed Monday down 4.2 percent, while Germany’s DAX index lost 2.7 percent.

Stocks have risen in an almost uninterrupted rally over the last 12 months, and so analysts say Wall Street is now in the midst of a long-anticipated, full-blown stock market correction, with the broader stock market expected to decline some 5 to 10 percent.

The next few weeks are likely to be challenging for stock investors according to A.C. Moore, chief investment strategist at Dunvegan Associates in Santa Barbara, Calif.

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“We don’t have the same drivers ahead of us that we had one year ago. So we’re more cautious,” Moore told CNBC. “We’re buying companies that have growth at a reasonable price, so we have some hatches battened down for the short term.”

Analysts also said investors sold stocks Monday prior to Tuesday’s policy meeting of the U.S. Federal Reserve, which was expected to give a clearer picture on whether interest rates would remain steady for the long term.

“If the Fed comes out with a really optimistic statement, that could help things,” Suskind said. “But even that might not be enough. Long-term, things look pretty good, and we should get some good pre-announcement on earnings. But short-term, there’s a lot of concern out there.”

That concern could extend through earnings season if investors continue to expect companies to shoot past Wall Street forecasts, said Russ Koesterich, U.S. equity strategist for State Street Corp.

“There’s been a big reduction in risk appetite over the past few months, and investors are becoming very critical,” Koesterich said. “The market has discounted a lot of good news, and there’s limited upside ahead. That doesn’t mean you should get out of the market, but the easy money’s behind us.”

Stocks sold off Monday despite some upbeat economic news.

The Federal Reserve Bank of New York delivered a bullish report on the strength of manufacturing in the New York region. And a government report said industrial production rose by a better-than-expected 0.7 percent in February, a sign that manufacturers may finally regain ground after lagging in the overall economic recovery.

Delta Air Lines was one of the biggest percentage losers on the Big Board. Its stock price plunged 12.2 percent to close at $7.76 after the airline forecast a larger quarterly loss, citing pressure on revenue and higher fuel prices. Other airline stocks fell sharply; the American Stock Exchange airline index lost 7.1 percent

Shares of General Electric fell almost 1 percent to $30.30 after it announced it would buy bomb-detection company InVision Technologies for $900 million in cash. InVision’s shares jumped 19.7 percent to $49.35.

Nortel Networks announced it is putting the company’s chief financial officer and its comptroller on paid leave as the board of directors investigates Nortel’s 2003 earnings statements. Nortel’s shares fell 18.5 percent to $5.24.

Shares of Martha Stewart Living Omnimedia fell 3.5 percent to $9.97 after Stewart resigned Monday from the board and as chief creative officer of the empire she built, a little more than a week after she was convicted of lying to investigators related to a 2001 stock sale.

Japan’s Nikkei average closed Monday 1.4 percent higher.

The Associated Press contributed to this report

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