"The news is a wake-up call to investors that the European sovereign debt issue is far from being resolved," Doug Kass of Seabreeze Partners wrote in a note.
With Cyprus banks closed on Monday and investors draining cash machines over the weekend, the government is reportedly looking to change the levy to lessen its blow on smaller savers.
According to sources cited by the Dow Jones news agency, the proposal would see savers with less than 100,000 euros in Cypriot accounts pay a one-time tax of 3 percent. Those with deposits from 100,000 to 500,000 euros would pay 10 percent and anyone with over 500,000 euros in their accounts would pay 15 percent. Up to 40 percent of deposits in Cypriot banks are owned by foreigners.
U.S. bank stocks were lower across the board, including JPMorgan and Bank of America.
On the economic front, the National Association of Home Builders/Wells Fargo is scheduled to report the housing market index for March at 10:00 am ET. Economists in a Reuters survey expect a reading of 47, versus 46 in February.
The Federal Reserve is scheduled to hold a two-day meeting later this week and investors will be watching for any signs that the central bank could start winding down its quantitative easing program. The Fed's meeting will culminate with the release of its policy statement, economic forecasts and a press briefing by Fed Chairman Ben Bernanke on Wednesday afternoon.
Verizon was upgraded to "buy" from "neutral" at Citigroup, which now sees the telecommunications firm executing a buyout of Vodafone's stake in Verizon Wireless that provides tax efficiency for Vodafone and earnings accretion for Verizon.
Hewlett-Packard edged higher after Morgan Stanley upgraded the tech firm to "overweight" from "equal weight," citing positive momentum in both free cash flow and earnings, which will accelerate the timing of cash being returned to investors.