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The Nasdaq composite index .IXIC dropped 1.4 percent and closed just above its 50-day moving average, a widely followed technical level that if breached could signal more declines in the sector that has helped lead the market rally.

Wells Fargo downgraded the semiconductor sector, noting its strong upward moves. The PHLX semiconductor index .SOX has risen 130 percent since March 2009. The index also is up 45 percent since the start of September, while the broad S&P 500 has advanced about 25 percent in that period.

Also weighing on Nasdaq, communications equipment maker Ciena Corp (CIEN.O) forecast weaker-than-expected sales, sending its shares sliding 9.2 percent to $25.98.

Investors "are jumping on an opportune seasonal slowdown that typically happens between March and July for tech," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco. "It has been one of the leadership groups since August."

Brent crude has been on investors' radar as analysts and economists gauge how it might hurt economic demand if prices continue to rise. Crude edged lower on Monday after hitting its highest since September 2008 on conflict in the Middle East. Brent crude dipped 0.8 percent to $115.20 a barrel.

The Dow Jones industrial average .DJI dropped 79.85 points, or 0.66 percent, to 12,090.03. The Standard & Poor's 500 Index .SPX fell 11.02 points, or 0.83 percent, to 1,310.13. The Nasdaq Composite Index .IXIC lost 39.04 points, or 1.40 percent, to 2,745.63.

Wells Fargo said downgrading the semiconductor sector to "market weight" from "overweight" was "an indication of a moderate though still optimistic view."

Even though gains in semis have outpaced the broader market, the S&P 500 and the semiconductor index have been moving in the same direction, which could mean further declines in the sector and spell more of the same for the overall market.

A 20-day correlation between the S&P 500 and the semiconductor index .SOX was at 0.92, with a reading of 1 suggesting a perfect correlation.

Tech has been a favorite of analysts, along with other cyclical sectors.

The CBOE volatility index .VIX rose 8.2 percent to 20.63. Joe Kinahan, chief derivatives strategist at TD Ameritrade in Chicago said investors were insuring against a possible fall below 1,300 for the S&P 500.

"If we break this level the S&P could continue all the way down to 1,275. So many investors are trying to get ahead of this by paying up for portfolio protection in the form of index and equity options," he said.

Worries about the effects of recent higher oil prices on the economy have been a negative for stocks, but analysts recommend buying the energy sector.

"Industrials are ultimately affected by energy prices, so a sector that works as a hedge would be the energy sector," said Bryant Evans, investment adviser and portfolio manager at Cozad Asset Management in Champaign, Illinois.

The offer, at a 60 percent premium to Bulgari's average share price over the past month, could herald the return of consolidation in the luxury market, which bounced back from the 2009 slump much faster than analysts expected.

Bulgari will benefit from world No. 1 LVMH's global retail network, improve margins through cost-sharing and help the owner of Louis Vuitton handbags close the gap with bigger watch and jewelry companies Richemont (CFR.VX) and Swatch (UHR.VX).

Analysts said the high price was justified by the savings.

"The high price is probably explained by the fact that there were rival suitors," said fund manager Gerard Moulin from Delubas Asset Management in Paris.

Rival bidders included the Richemont group and PPR (PRTP.PA), sources close to the groups told Reuters on Monday. Both groups declined to comment.

Any acquisition of family-controlled assets usually sees a buyer paying a sizeable premium to convince families to sell.

The deal valued Bulgari on a ratio of enterprise value to sales of about 3 times, compared with other potential takeover candidates Burberry (BRBY.L) on 2.7 times and Tiffany (TIF.N) on 2.3 times, using forward sales estimates.

"This multiple is in line with historic deals in the sector and the recent acquisition of (online luxury fashion retailer) Net-a-porter by Richemont," which was roughly 3 times enterprise value to sales, Deutsche Bank said in a note.

The total value of the deal, including 600 million euros of convertible bonds, was 4.3 billion. It will be paid for with 1.9 billion euros of new LVMH shares and 2.4 billion cash to buy out minority shareholders, financed half with debt and half with LVMH's available cash.

Spearheaded by Arnault, LVMH was built on acquisitions and its brands also include Chaumet and Fred jewelry, Celine and Kenzo fashion, Hennessy cognac and Moet & Chandon champagne.

"Bulgari is one of the best known jewelry brands in the world, with lots of potential to grow on the back of LVMH's global distribution reach and financial muscle," Bernstein luxury analyst Luca Solca said.

The deal will double LVMH's watch and jewelry business to make up 10 percent of its sales and about 6 percent of operating profit, analysts estimated.

Analysts believe the deal could lead rival groups to embark on a fresh consoldation wave, encouraged by the strong sales visibility they are getting from big emerging luxury markets such as China.

Bulgari (BULG.MI), established in 1884, had long been seen as a potential target having weakened its finances by embarking on big store investments when its sales were falling. There was regular speculation Swiss group Swatch could take it over.

The move increased pressure on euro zone leaders to ease repayment terms on bailout loans to Athens, just as Germany and its allies seem to have turned their backs on more radical steps to help it reduce its debt through bond purchases or buy-backs.

Moody's Investors Service downgraded Greek debt to B1 from Ba1 -- lower than Egypt -- and said it may cut further, drawing an indignant protest from the Greek Finance Ministry.

"The likelihood of a default or distressed exchange has risen since its last downgrade of the Greek government debt rating in June 2010," Moody's said in a statement.

The downgrade sent a ripple of anxiety around credit markets, raising the price of insuring Greek, Portuguese and Spanish debt against default and the risk premium on holding Greek bonds rather than benchmark German bunds.

Portuguese government bond yields hit a euro lifetime high of 7.65 percent, heightening pressure on Lisbon to seek an EU/IMF bailout in the wake of Greece and Ireland.

Ahead of a euro zone summit on Friday, European Monetary Affairs Commissioner Olli Rehn made the case for reducing interest rates paid by Athens and Dublin on euro zone rescue loans and extending the maturities to enable them to achieve debt sustainability.

Moody's cited risks to Greece's fiscal consolidation program from a revenue shortfall and difficulties in reforming healthcare and state-owned companies.

Greece signed a 110 billion euros ($154 billion) rescue package with the EU and IMF last May to avoid default in exchange for draconian austerity measures which it has begun to implement. But many see the repayment terms as too onerous.

"The sheer magnitude of the task becomes ever more apparent," said Sarah Carlson, Moody's lead analyst on Greece.

Even if it fulfils the entire three-year adjustment program, its debt is projected to reach 158 percent of gross domestic product in 2013, a level widely seen as unsustainable.

"There is a risk that conditions attached to any kind of continuing support after 2013 could take solvency criteria into account that the country may not be able to satisfy, and therefore could result in a restructuring of existing debt," Carlson told Reuters.

"HIGHLY SPECULATIVE"

The European Central Bank, which has intervened repeatedly since last May to calm bond markets by buying euro zone peripheral sovereign debt, said it made no purchases last week in the run up to Friday's euro zone summit.

Moody's was the first of the three major ratings agencies to classify Greek debt as "highly speculative."

That well-known line from the classic 1967 movie "The Graduate" may sum up the recent investment strategy of some top hedge fund managers, including James Dinan and David Einhorn.

A wave of managers snapped up shares of LyondellBasell Industries, which makes chemicals like propylene and polyethylene, the stuff that goes into plastics.

The popularity of plastics and raw materials signals that hedge funds are diversifying commodity bets beyond gold, the darling of 2010 returning 30 percent, as inflationary pressures seep into food and energy.

Top hedge funds' bets on LyondellBasell and other raw materials producers like Penn West Petroleum and Repsol YPF SA suggest investors are seeking out commodity-related plays as the global economy wiggles out of a bruising recession.

LyondellBasell -- the third-largest chemical maker in the United States -- was certainly hurt by the downturn, declaring bankruptcy in early 2009.

But after LyondellBasell emerged back onto the public markets in October, Dinan's York Capital Management and Einhorn's Greenlight Capital, along with Andreas Halvorsen's Viking Global Investors and Thomas Steyer's Farallon Capital Management disclosed their stakes in LyondellBasell.

"LyondellBasell produces a commodity that goes into a lot of things we use every day," said Matthew Eagan, a portfolio manager at $150 billion Loomis Sayles in Boston.

Propylene is a molded plastic used in making rope, clothing, car parts and many other common products. Polyethylene is the most common plastic, used in products from shopping bags to bullet-proof vests.

Global growth is on the rebound, led by nearly 10 percent growth in China, whose urbanization and industrialization have turned it into the world's top consumer of many commodities. This growth and the climbing price of oil could trigger half a trillion dollars of commodity investments by the end of this year, according to Barclays Capital.

"Inventory levels generally remain tight, supply disruptions continue to add further supply pressure for multiple commodities, and demand generally continues to grow in emerging markets and recover in developed markets," said Nelson Louie, global head of commodities at Credit Suisse Asset Management.

Staples like wheat, rice and corn have reached record prices, and gold jumped above $1,400 an ounce recently.

To be sure, there are obvious risks that could slow growth and put a damper on many commodity prices. Rising political tension in the Middle East and North Africa have sent oil surging 7 percent since December. Though still manageable, further increases could deal a significant blow to the economic rebound, another Barclays report said.

Still, the "Smart Money 30," a group of some of the largest stock-picking equity hedge funds, is betting big on commodities. The group is comprised of funds reporting the highest dollar value of equities in quarterly filings. Funds with more than 200 positions are excluded to avoid quantitative and rapid trading strategies.

Collectively, the group had almost 7 percent of its reported assets tied up in the materials sector at the end of 2010, double the sector's weight in the Standard & Poor's 500 index, according to data compiled by Thomson Reuters.