The Dow Jones industrial average, down nearly 123 points with less than a half hour to go, lost 86.58 points on the day, closing at 6,746.90.
The barometer of 30 big U.S. companies had held a gain of 39 points shortly after 2 p.m., when the Fed announced no increase in its key lending rates as protection against inflation.
Declining issues led advancers by a 12-to-7 margin on the New York Stock Exchange, with 960 up, 1,642 down and 754 unchanged. NYSE volume totaled 577.78 million shares vs. 491.85 million yesterday.
Broader measures fell sharply in the afternoon as well.
The Standard & Poor's 500-stock list, down nearly 16 points at its low, closed at 778.18, down 11.08. The NYSE's composite index fell 4.60 to 408.74. Both measures, dominated by blue-chip and other large companies, closed at record highs on Tuesday.
The Nasdaq composite index tumbled 25.31 to 1,348.44 after recovering from a 30-point slide. The American Stock Exchange composite index fell 3.84 to 585.41.
The technology-laden Nasdaq market posted the biggest losses amid a less-than enthusiastic response to Cisco Systems' strong profit report and a selloff in Intel Corp. shares following some brokerage downgrades of the chipmaker.
Trading was cautious and quiet through the early afternoon for the second day of a two-day meeting to discuss economic conditions around the country.
Investors had been hopeful that despite a pickup in the pace of business toward the end of 1996, Fed officials wouldn't see any need to hike interest rates as insurance against inflationary economic growth.
Bolstering the view that economic activity may be moderating again was this morning's report that orders to U.S. factories fell a bigger-than expected 1.3 percent in December.
But with a strong earnings-reporting season slowing to a trickle and several stock measures trading at or near record levels following January's blockbuster advance, the amenable conclusion to the Fed meeting left market players with little to look forward to in the near term.
The highlight of the morning was news that Dean Witter, Discover & Co. and Morgan Stanley Group Inc. have agreed to merge in a $10 billion deal that would create the world's biggest securities firm. Both companies' shares both rose in active NYSE trading.