I contributed $2000 to my Roth IRA in January 2000. I then earned too much in 2000 to be allowed to contribute. Unfortunately my investment was in an index fund and is now only worth $1500. Do I have to withdraw $2000 or just the $1500 that is left? Can I set the $500 loss against my capital gains? I can't find anything in publication 590 that tells you want to do if you lost money over the year.

You would need to withdraw only the $1,500. Bear in mind that if you have other assets in the account with this $2,000 contribution, then you must perform a calculation to determine the attributable income ( earnings) or loss on the excess contribution.
The IRS issued a notice last year (notice 2000-32) , which allowed the earnings on an excess contribution to be a negative figure.

The notice can be viewed at this web address.

http://www.benefitslink.com/IRS/notice2000-39.shtml


If you had no other assets added to this account, then there is no need to perform any calcuations.

If you determine that the excess lost during the computation period ( explained in the notice ) then you only need to withdraw the excess amount- minus the amount lost. In your case $1,500

If it makes you feel more comfortable, you could include an explanation with your tax retrn, i.e. letting the IRS know why you are reporting $1,500 instead of $2,000.