Stocks closed lower for the third-straight session Monday, extending sharp losses from the previous week, as investors digested headlines from Fed officials and amid ongoing worries over the debt ceiling and budget wrangling in Washington.
The Dow Jones Industrial Average declined 49.71 points to end at 15,401.38, dragged by new Dow member Goldman Sachs. Visa and Nike also officially joined the blue-chip index Monday, replacing Alcoa, Hewlett-Packard and Bank of America.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, spiked above 14.
Most key S&P sectors ended in the red, dragged by financials and consumer discretionary, while techs and utilities finished higher.
New York Fed President William Dudley said the central bank still needs to push hard against threats to the U.S. economic recovery, and fiscal uncertainties in particular "loom very large right now." Dudley defended the Fed's decision last week not to trim its aggressive bond-buying, arguing in a speech that any changes to the quantitative easing program mush be based on the most recent measures of economic health.
Dallas Fed President Richard Fisher said the Fed's decision to keep its bond-buying program has hurt the U.S. central bank's credibility. Fisher also criticized the White House's process of picking the next chair of the Federal Reserve.
(Read more: Pros share best bondplays regardless of taper)
BlackBerry closed higher after the smarpthone maker said it would be acquired by Canadian insurance company Fairfax Financial, for $9 a share, in a deal totaling $4.7 billion dollars. Shares were temporarily halted prior to the announcement.
Last week, the troubled smartphone maker's shares plunged nearly 17 percent after the company announced preliminary second-quarter results that disappointed estimates and cut approximately 40 percent of its workforce. Meanwhile, at least five brokerages slashed their price targets on the company's stock.
Apple spiked higher after the tech giant announced that sales for its new iPhone had set a record, with consumers snapping up a record 9 million smartphones within the first few days of its launch. In addition, the company said there were more than 200 million downloads of its new iOS 7 platform.
Meanwhile, Microsoft introduced its next generation Surface tablet at an event in New York City. The new Surface Pro 2 is lighter and thinner and features 75 percent longer battery life and is 95 percent faster than all laptops on the market, the company said.
Citigroup slumped after the banking giant saw a significant drop in trading revenue during the third quarter which could hurt the bank's earnings, according to a report from the Financial Times. Other banks including Bank of America and Goldman Sachs also declined.
Budget talks are expected to continue this week with the aim of passing a resolution to fund government beyond October 1. On Friday, Republicans passed a bill that would fund the government until December 15, but would defund Obamacare.
Daiwa Capital Market's Michael Moran warned that acrimonious debate could shake consumers and businesses' resurgent confidence and lead to a reduction in spending plans.
"This seemed to occur in 2011, when GDP in Q3 advanced only 1.4 percent in the wake of the heated debate over the debt ceiling… Discord could easily arise in the upcoming debate, as some legislators are attempting to use the new legislation to defund the Affordable Care Act, obviously a sensitive issue and a risky strategy," he said in a report.
(Read more: 'Dr. Doom' Roubinimakes case FOR the US economy)
In Europe, business activity in the euro zone grew faster than forecast in September, thanks to improvements in both Germany and France.
German Chancellor Angela Merkel performed better-than-expected in Sunday's national elections, meaning she is almost certainly guaranteed a third term. However, she is likely to opt to form a new "grand" coalition with the center-left Social Democratic Party.
In Asia, shares were mixed on Monday as investors digested better-than-expected Chinese factory activity data. However, trading volumes were thin, with Japanese markets shut for a public holiday.
HSBC's flash manufacturing PMI of small and medium-sized firms in China hit a six-month high of 51.2 in September, higher than August's reading of 50.1, thanks to stronger domestic and foreign demand.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
On Tap This Week:
TUESDAY: Fed's Pianalto speaks, FHFA home price index, S&P Case-Shiller index, consumer confidence, Richmond Fed mfg index, Fed's George speaks, 2-yr note auction; Earnings from CarMax, Lennar, KBHome
WEDNESDAY: Mortgage applications, durable goods orders, new home sales, oil inventories, 5-yr note auction, Samsung Galaxy products available; Earnings from AutoZone, Bed Bath & Beyond
THURSDAY: GDP, jobless claims, corporate profits, pending home sales, natural gas inventories, Fed Kocherlakota speaks, 7-yr note auction, Fed balance sheet/money supply, Fed's George speaks, weekly rail numbers; Earnings from Nike, Accenture
FRIDAY: Fed's Evans speaks, personal income & outlays, consumer sentiment, Fed's Dudley speaks, farm prices; Earnings from BlackBerry
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