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NEW YORK — Already sluggish investors stayed on the sidelines Tuesday ahead of key earnings reports and next week's Federal Open Market Committee meeting on interest rates.

The Dow Jones industrial average fell 66.88 points, or 0.6 percent, to 10,536.75. Gains with General Motors, Procter & Gamble and Coca-Cola offset losses with American Express and Hewlett-Packard.

Biotech and computer issues weighed down the Nasdaq 84.37 points, or 2.3 percent, to 3585.01. Some of the big-cap losers were Intel and Dell Computers. Microsoft also traded down a day before the company is scheduled to submit a response to the government's plan to split the company in two.

Analysts said investors are in a defensive mode as Wall Street is preparing for what could be a full-scale assault on inflation by the Federal Reserve. Many on Wall Street now expect the central bank to raise interest rates by a tough 50-basis points when it meets on May 16th.

"There is no appetite for stocks right now," said Larry Wachtel of Prudential Securities. "We are just kind of drifting."

With few major economic indicators coming out this week, stock trading has been slow in recent sessions. The volume traded today in both indices was light. Monday was the quietest session of the year so far.

After a early morning rally, the Nasdaq plunged into the red, unable to sustain several attempts at a rebound. Decliners beat advancers 9 to 1. No sector, except banking, was spared.

Tech stocks remained under pressure as traders awaited a key conference between IBM's CEO and Wall Street analysts after the close.

Traders also awaited 3rd quarter earnings report from bellwether Cisco Systems, due after the closing bell. The tech heavyweight is expected to report a profit of 13 cents a share, which is a 10 cent increase during the same period last year.

Cisco Systems pulled down the broader market yesterday after a bearish report. Over the weekend, Barron's magazine, a financial weekly, questioned the company's valuation and accounting techniques of many acquisitions. Such skepticism had a domino effect, throwing into question the valuations of many top technology stocks.

"This is the look the market is going to have this month," said Barry Hyman, market strategist for Ehrenkrantz, King Nussbaum "There are valuation concerns, which was brought on by Cisco, the granddaddy of all valuation concerns. Money for now is moving back toward traditional stocks."

Bill Meehan, chief market analyst at Cantor Fitzgerald, agreed. "Valuations will be more and more of a concern as interest rates continue back up."

William P. Miller, chief investment officer of large cap equities at American Express Asset Management Group in Minneapolis, said investors continued to trim their holdings of tech stocks after a recent runup and parking their money in traditional safe-haven stocks like drug and food makers.

"The market is moving to a consensus that the Fed is going to raise rates, and that they might have to be more aggressive than they thought," Miller said. "People are booking profits ahead of next week, and since much of the runup was in the tech sector, that's where they're selling."

More key figures on retail sales and inflation pressure at the wholesale level are due out on Thursday and Friday, respectively.

— The Associated Press and Reuters contributed to this report

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