Stocks were already lower on worries about weak first-quarter earnings when the minutes from the Fed's March 18 meeting were released. The minutes showed that some central bank officials, who forecast that the economy would contract during the first half, were concerned about the possibility of a "prolonged and severe" business downturn.

The minutes also indicated that Fed officials were conflicted over how much more interest rates could be reduced at the expense of higher inflation. The combination of a slow economy but not much more room for interest rate cuts at first rattled investors and sent the Dow Jones industrials to a loss of 86 points, although the blue chips regained some ground in the final hour of trading.

The market's overall steadiness indicated to analysts that investors are more level-headed than they were just a few weeks ago, when the global banking system was in crisis mode and Bear Stearns Cos. was forced to accept a buyout from JPMorgan Chase & Co.

But corporate reports at the start of first-quarter earnings season were nonetheless troubling. Given a 54 percent drop in Alcoa's first-quarter profit, a 15 percent drop in AMD's first-quarter sales and a lowered profit outlook at rival chip maker Novellus Systems Inc., it appears to some on Wall Street that they might have to pare back their profit estimates for this year.

"While investors had a pretty much washed-out, pessimistic view of the economy, those investors also had an unrealistic view on earnings ... It seems investors are conflicted between their pessimism on the economy and their optimism on earnings," said Jack A. Ablin, chief investment officer at Harris Private Bank. "The good news is, we've moved away from emotional, jittery trading to a reconciliation of values. The market is substantially more rational than it was."

The Dow fell 35.99, or 0.29 percent, to 12,576.44.

Broader stock indicators also dropped. The Standard & Poor's 500 index fell 7.00, or 0.51 percent, to 1,365.54, and the Nasdaq composite index fell 16.07, or 0.68 percent, to 2,348.76, taking a larger hit because of concerns about high-tech companies following the news from AMD and Novellus.

Government bonds were little changed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, ended at 3.56 percent, up from 3.54 late Monday.

Continuing bad news about fallout from the credit crisis added to the session's downbeat tone, but investors ultimately stayed calm and sold in an orderly fashion.

The International Monetary Fund said Tuesday that despite "unprecedented intervention" by the Fed and other central banks, "financial markets remain under considerable strain." The group estimated that potential credit-related losses for the financial industry had reached $945 billion as of March - a "staggering number," said Hugh Johnson, chief investment officer of Johnson Illington Advisors.

The credit markets have been performing much better after rate moves and massive lending efforts by the Fed, but many experts say it will be hard for the markets to loosen further with the housing market still on the decline. The National Association of Realtors said February's pending home sales fell by 1.9 percent compared to January, worse than many analysts had predicted, but the market appeared to have little reaction.

Washington Mutual Inc., one of the financial companies hurt by investments in soured mortgages, said it is raising $7 billion by selling a stake to a private equity investment group. But the Seattle-based thrift also said it will lose $1.1 billion during the first quarter, stash away $3.5 billion for loan losses and cut its quarterly dividend to shareholders to a penny from 15 cents.

WaMu shares fell $1.34, or 10.2 percent, to $11.81.

Meanwhile, a day after its disappointing earnings report, Alcoa fell 26 cents to $37.18, having dropped 4 percent Monday ahead of its earnings release.

AMD shares fell 31 cents, or 4.9 percent, to $6.03, and Novellus fell $1.93, or 8.1 percent, to $21.88.

Light, sweet crude fell 59 cents to settle at $108.50 a barrel on the New York Mercantile Exchange. Gold prices closed down, while the dollar traded mixed against other major currencies.

The Russell 2000 index of smaller companies fell 0.76, or 0.11 percent, to 711.92.

Declining issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where consolidated volume was about 3.66 billion shares, virtually the same as Monday.

Overseas, Japan's Nikkei stock average fell 1.49 percent. Britain's FTSE 100 slid 0.41 percent, Germany's DAX index lost 0.72 percent, and France's CAC-40 dropped 0.65 percent.

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