Stocks slump. What is going on?

Stocks dropped on Thursday, led by a 3 percent decline in the Nasdaq, after tech bellwether Cisco Systems Inc (CSCO.O: Quote, Profile, Research) signaled to investors that credit market woes were hurting demand from key customers, including banks.

The Dow industrials and the S&P 500 index each slid more than 1 percent, a day after the stock market's heavy losses gave the Nasdaq its worst percentage decline since the February 27 sell-off.

Cisco's chief executive said late on Wednesday the largest maker of computer networking equipment suffered a dramatic drop

in orders from banks and retailers, triggering concerns about Cisco's growth prospects, which relies on business spending.

Shares of Cisco fell 8.4 percent to $29.99 and were the catalyst for the slide by other tech shares, analysts said.

"The momentum game broke down today in tech. It looks like it finally took a severe break. Look at Google, Baidu.com, RIM, Apple. Those stocks have gotten creamed," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

The Dow Jones industrial average (.DJI: Quote, Profile, Research) was down 162.01 points, or 1.22 percent, at 13,138.01. The Standard & Poor's 500 Index (.SPX: Quote, Profile, Research) was down 17.30 points, or 1.17 percent, at 1,458.32. The Nasdaq Composite Index (.IXIC: Quote, Profile, Research) was down 86.43 points, or 3.14 percent, at 2,662.33.

Shares of International Business Machines Corp (IBM.N: Quote, Profile, Research), the technology services company, were the biggest drag on the Dow.

Until recently investors had been optimistic that tech shares offered a safe haven amid the credit turmoil that has roiled shares of banks and brokerages.

Gains in a handful of big technology companies offset recent stock market losses, allowing the S&P to post a 1.5 percent gain last month and the Nasdaq to rise 5.8 percent.

Federal Reserve Chairman Ben Bernanke added to the sense of caution after he said the economy faced risks on both the growth and inflation fronts. A record warm October hurt monthly sales by retailers, knocking some shares lower.

IBM shares were down 6 percent at $104.42. Computer maker Hewlett-Packard Co (HPQ.N: Quote, Profile, Research) fell 5.4 percent to $49.04.