Rate-cut doubts sink Wall Street

NEW YORK (Reuters) - Stock indexes dropped for a third straight session on Wednesday after Federal Reserve officials cast doubt on the outlook for more interest rate cuts, driving the Nasdaq into bear market territory.

The Nasdaq's woes worsened after the bell, with network equipment maker Cisco Systems (CSCO.O) dropping more than 7 percent after the tech bellwether forecast disappointing third-quarter revenue growth, citing economic concerns. Cisco's chief executive John Chambers also said CEOs in the United States and Europe are as cautious as he had seen in many years.

That news spurred an after-hours sell-off in other big technology companies, including Apple (AAPL.O) and Intel (INTC.O), and drove stock index futures lower.

"Cisco helps further the notion that the economy is weak at the very best. It's worrisome and the market is not going to like it," said Chip Hanlon, president Delta Global Advisors, Inc. in Huntington Beach, California.

During the regular session, an early market rally faded after two Federal Reserve Bank presidents said policy-makers need to remain vigilant against quickening inflation pressures this year, even as the economy slows sharply.

Adding to the pessimism, Macy's Inc (M.N) released dismal sales figures, stoking anxiety about Thursday's wave of sales results due from an array of retailers.

That punctured the market's earlier attempt at a rebound from Tuesday's steep drop, which had been fueled by strong financial results from Walt Disney Co (DIS.N) and Time Warner Inc (TWX.N).

The two media conglomerates fed some optimism that corporate profits outside the financial sector were holding up.

The Dow Jones industrial average .DJI ended down 65.03 points, or 0.53 percent, at 12,200.10. The Standard & Poor's 500 Index .SPX was down 10.19 points, or 0.76 percent, at 1,326.45. The Nasdaq Composite Index .IXIC was down 30.82 points, or 1.33 percent, at 2,278.75.

The comments from the Fed officials undermined speculation that the Fed would need to make another emergency rate cut following reports on job creation and service-sector growth that suggested the economy was slipping into recession.

"I think they're just trying to temper the comments that you've been seeing in the last few days that the Fed needs another intermeeting cut," said Subodh Kumar, chief investment strategist, Subodh Kumar & Associates in Toronto. "The market is responding to this uncertainty."

The Nasdaq is now down 20.3 percent from its October peak, signaling that a bull market run that had begun in October 2002 is officially over.

After the bell, Cisco shares fell 7.2 percent to $21.42, while Apple dropped 1.7 percent to $119. Adding to the gloom, Electronic Data Systems Corp EDS.N, the second-largest technology outsourcing company, posted a lower-than-expected profit and weak earnings outlook, sending its shares down 5.1 percent to $18.60.

In the regular session, shares of CME Group Inc CME.N and NYMEX Holdings Inc NMX.N both tumbled 17.6 percent as investors feared a Department of Justice call for a shake-up in financial-futures exchanges may thwart a proposed merger of the two exchange operators.

CME shares fell to $485.25 and NYMEX ended at $87.88.

Macy's shares were down 4.6 percent at $23.94 after the department store chain said sales at stores open at least one year fell 7.1 percent last month.

A $147.4-billion takeover offer for Anglo-Australian miner Rio Tinto (RIO.AX) (RIO.L) by rival BHP Billiton (BHP.AX) BHP.L failed to stir enthusiasm in the U.S. equity market.

Shares of Disney jumped 4.8 percent to $31.50 on earnings that topped Wall Street estimates, while Time Warner shares rose 2 percent to $15.71 after it said it expects profit growth to match or beat Wall Street expectations.

(Additional reporting by Kristina Cooke, reporting by Jennifer Coogan; editing by Gary Crosse)