The Dow, up more than 56 points shortly after 2 p.m. on Wall Street, slid to a loss of nearly 108 points before steadying and finishing with a drop of 94.28 to close at 6.755.75.
The Dow had rallied as a series of impressive earnings reports from United Technologies, McDonald's Corp. and Texaco Inc. helped make a distant memory out of yesterday's disappointment over IBM Corp.'s results.
But the momentum died as bonds turned lower, boosting interest rates, as the market absorbed a new supply of securities from a government auction of $12.5 billion in new 5-year Treasury notes.
Analysts also noted that the bond market's recent jitters have been aggravated by fears that the stream of generally robust profit reports has confirmed growing suspicions that the economy may be accelerating at an inflationary pace.
As bonds fell, the yield on the 30-year Treasury bond - a key determinant of corporate and consumer borrowing costs - rose to IBM extending yesterday's 10-point slide, plunged 61/4 more points after a brief morning rebound. Several brokerages have 6.85 percent from late yesterday's 6.83 percent.
Broader measures also fell sharply after spending most of the session at record levels.
The Standard & Poor's 500-stock index fell 8.67 to 777.56, and the NYSE's composite index lost 3.65 points to 409.15. The Nasdaq composite index dropped 9.70 to 1,378.36, and the American Stock Exchange index fell 1.18 to close at 589.69.
NYSE volume totaled a record 683.80 million shares, vs. 585.72 million shares yesterday.
Declining issues outnumbered advancers by a 5-to-4 margin on the New York Stock Exchange, with 1,140 up, 1,446 down and 760 unchanged.
The Dow's biggest gainer was United Technologies, which surged after the maker of jet engines, helicopters, elevators and air conditioning systems beat expectations with its fourth-quarter earnings report.
Among other Dow components posting better-than-expected results for the last three months of 1996 were Texaco and McDonald's. Eastman Kodak was the only other gainer in the Dow. Sears also reported strong fourth-quarter profits, but the retailer's shares fell.