Stocks ended the month of May with big losses, with the Dow and S&P 500 posting their worst one-day drops since mid-April, but major averages still logged monthly gains.
Traders cited technical reasons for the sharp late-afternoon selloff in addition to month-end rebalancing and window dressing.
(Read More: The 'Hindenburg Omen': Bear Signal Scares Market)
"It almost feels as if this is the beginning of the correction—there are also some fears about the months of June," said Art Hogan, managing director at Lazard Capital Markets. "There's uncertainty over Japan, uncertainty over the pace of QE, and we've got investors that have already seen some healthy gains this year."
June is one of the worst months on average for the stock market, down an average of 0.1 percent.
(Read More: Stocks, Sectors to Watch in June)
The Dow Jones Industrial Average tumbled 208.96 points, or 1.36 percent, to close at 15,115.57, dragged by Hewlett-Packard and Pfizer. This was the eighth session in a row where the blue-chip index traded in a triple-digit trading range.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, spiked above 16.
While all three major averages finished lower for the second-consecutive week, the Dow rallied 1.86 percent, the S&P 500 jumped 2.08 percent, and the Nasdaq soared 3.82 percent for the month of May, defying the traditional Wall Street slogan: "Sell in May and go away."
According to the trading adage, the market performs best in the six months from November through April, and worst in the period from May through October.
With the monthly gains, the Dow posted its sixth-consecutive month of gains and the S&P 500 and Nasdaq logged their seventh-straight month in positive territory. And so far in 2013, all three major averages have surged nearly 15 percent each.
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For the month, cyclical sectors including financials, industrials and techs were the best performers, while defensive sectors utilities, telecoms, and consumer staples ended in the red.
On the economic front, consumer sentiment hit its highest level in nearly six years in May, rising to 84.5 from 76.4 in April, according to the Thomson Reuters/University of Michigan's final reading on the overall index. And business activity in the Midwest rose in May, rebounding after a contraction in the month prior, according to the Institute for Supply Management-Chicago.
But consumer spending fell 0.2 percent in April for the first time in almost a year, according to the Commerce Department, disappointing economists who had expected a gain of 0.1 percent. And inflation pressures remained subdued, rising just 0.7 percent in the last 12 months, the smallest increase since October 2009.
The weak spending and the lack of inflation pressures could dampen market speculation the U.S. central bank might start scaling back monetary easing later this year.
"All eyes remain on the U.S., analyzing every piece of data to establish if, and when, stimulus measures will be withdrawn—with every piece of bad news being actively welcomed by the market," wrote Rebecca O'Keeffe, head of investment at Interactive Investor. "This inverted logic is unsustainable in the long term, but for the moment, as the withdrawal of liquidity is perceived as being more painful than an economic slowdown, investors are happy to live in this bubble for as long as they can."
(Read More: Rising Yields May Stifle Boom in Dividend Stocks)
Dell eked out a gain after news that a special committee recommended that shareholders approve the bid from founder Michael Dell and Silver Lake to take the computer maker private.
Among earnings, Lions Gate rallied after the entertainment company topped earnings expectations, thanks to its box-office success of "The Hunger Games" and the company's acquisition last year of independent studio Summit Entertainment.
Krispy Kreme zipped higher after the doughnut maker easily topped earnings expectations and also raised its full-year guidance.
Japan's Nikkei rebounded 1.4 percent, recovering some of the previous session's 5 percent slump. European markets finished in the red after data showed euro zone unemployment rose to a record 12.2 percent in April. Adding to woes, April retail sales in Germany were lower than expected.
Oil prices fell below $92 a barrel after OPEC said it would maintain its output target of 30 million barrels a day despite ample crude supplies. The automobile association expects the average gasoline price to continue to slide, and fall below $3.50 in June.
(Read More: Rising Oil Prices: The Euro Zone's Next Big Problem?)
—By CNBC's JeeYeon Park. Follow JeeYeon on Twitter: @JeeYeonParkCNBC
On Tap Next Week:
MONDAY: PMI manufacturing index, ISM manufacturing index, construction spending, auto sales
TUESDAY: International trade, Fed's George speaks, Tesla shareholder mtg; Earnings from Dollar General
WEDNESDAY: MBA mortgage applications, ADP employment report, productivity & costs, factory orders, ISM non-mfg index, oil inventories, Beige Book, Las Vegas Sands shareholder mtg, Under Armour investor day, Yelp shareholder mtg; Earnings from Hovnanian, VeriFone
THURSDAY: Bank of England announcement, Challenger job-cut report, ECB announcement, jobless claims, quarterly services survey, natural gas inventories, Fed balance sheet/money supply, chain store sales, Wal-Mart shareholder mtg, Google shareholder mtg, GM annual mtg; Earnings from Ann, JM Smucker, Cooper Cos., Vail Resorts
FRIDAY: Employment situation, consumer credit
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