Stocks fell on Friday, hit by a drop in technology shares, including Microsoft Corp, on concern about the profit outlook, while news of more credit losses dragged on financial services companies.

Even so, some investors sought beaten-down shares and companies likely to withstand a slowdown, helping indexes to pare losses temporarily.

The latest disappointment from the tech sector, which until recently had boosted the market, came from Qualcomm Inc. The wireless technology developer forecast 2008 earnings and revenue below analysts' expectations.

Wachovia Corp, the fourth-largest U.S. bank, said it had incurred about $1.1 billion of losses on mortgage securities in October. An index of financial company shares fell to two-year lows.

The banks' scenario is extremely challenging, said Ted Oberhaus, manager of equity trading at Lord Abbett & Co.

The Dow Jones industrial average was down 216.39 points, or 1.63 percent, at 13,049.90. The Standard & Poor's 500 Index was down 22.84 points, or 1.55 percent, at 1,451.93. The Nasdaq Composite Index was down 65.93 points, or 2.45 percent, at 2,630.07.

There's also a very challenging domestic earnings environment going on right now, and people are fleeing dollar-denominated assets for better growth overseas, though there's buying into these dips, Oberhaus said.

Shares of Qualcomm led losses on the Nasdaq with a decline of more than 3 percent to $38.25, while software maker Microsoft declined 1.9 percent to $34.08.

Tech services company IBM was the Dow's top drag, down 2.9 percent at $103.01.

Wachovia shares dropped 1.9 percent to $39.55. The S&P financial index was off 1.1 percent.

Fannie Mae, the largest source of mortgage financing in the United States, posted a third-quarter net loss that was double its loss from a year ago. Its shares dropped 6.1 percent to $46.76 on the NYSE.

In a sign of other credit troubles, Capital One, the largest independent MasterCard and Visa credit card issuer, said more customers were missing payments. Its shares fell 1.6 percent to $52.02 on the NYSE.

Bargain hunters bought chip-related stocks, including Applied Materials Inc, which rose more than 7 percent to $19.24 after a brokerage upgrade.

Defensive stocks that rose included drug company Merck & Co. The drug company was the biggest Dow gainer as investors welcomed an agreement to settle claims related to painkiller Vioxx. Merck rose 3.4 percent to $56.65.

(Editing by Kenneth Barry)