Stocks ended with the biggest decline in two weeks and the Dow closed down for the fourth straight session after strong economic data lowered the odds of a near-term cut in interest rates.
"The market was looking for a reason to pull back," said Brian Belski, chief U.S. sector strategist at Merrill Lynch. "Coming into the holiday weekend, it's not surprising that we're seeing some weakness today."
The Dow Jones Industrial Average erased an early gain of 100 points, moving in a wide 200-point range. The S&P 500 retreated into negative territory after briefly moving above the all-time closing high of 1527.46, set in March 2000. It was the fourth straight session the index has tested and failed to break the record.
Monthly new home sales and revised durable goods orders data, released this morning, both reflected a stronger economy.
"We saw the housing news and the bond market spooked the market a little bit," said Belski. "The internals of the market have been relatively soft heading into this week, especially considering the flat activity after the huge run so far in the second quarter."
"At least initially it was good news for the marketplace because it took a possible recession out of the equation," said Jay Suskind, head of trading at Ryan Beck. "But then the equities market looked at the bond market and said 'Whoa, do we need to worry about a Fed tightening down the road?'"
Breadth was overwhelmingly negative with decliners outpacing gainers by more than four to one. All but five of the 30 components in the Dow closed lower, while all 10 sectors tracked by S&P ended with a loss.
Tech stocks fell after a handful of companies issued quarterly sales warnings due to weak corporate spending, sending the Nasdaq Composite down 1.5%.
Dell plans to sell low-priced desktop computers at more than 3,500 North American stores operated by Wal-Mart Stores , the world's largest retailer said on Thursday. The struggling computer maker is moving beyond its longstanding direct sales business model as it fights to win back market share from Hewlett-Packard.
Chip stocks such as Intel , Advanced Micro Devices and Nvidia saw broad weakness, due in part to Dell's pact with Wal-Mart, which is known for leaning on its suppliers to cut prices.
Shares of Network Appliance were sharply lower after the storage technology company reported a slowdown in March will cause the company to report weaker-than-expected results for the second quarter. Rival EMC gained on the news.
Bausch & Lomb rose after CNBC's David Faber reported that Advanced Medical Optics is pursuing a bid for the eye care products manufacturer. Advanced Medical Optics confirmed the report.
Shares of Dow component Boeing hit a new all-time high after Air France said it ordered more than $4 billion worth of Boeing's planes.
General Motors, another Dow component, traded lower after the automaker said it received a document request from the SEC related to derivative trading of foreign exchange and commodities contracts.
New home sales surged 16% in April to a seasonally adjusted annual rate of 981,000 units, easily topping economists' forecasts. Durable goods orders rose for the third straight month, up 0.6% in April while core capital equipment orders, a key measure of business spending, rose 1.2%.
Bond yields jumped following Thursday's housing data as the benchmark 10-year Treasury rose to its highest yield since January but recovered by the end of the session.
New York light sweet crude futures fell 2.2%, closing well below $65 a barrel, after weekly inventory data showed a slightly higher-than-expected build in natural gas inventories.
Europe, Asia Close Lower
The London FTSE-100 attempted to rally to the flatline, but finished the session lower.
The Frankfurt DAX turned lower following five straight days of gains. German shipping and tourism group TUI said it will issue $740 million of convertible bonds in a debt refinancing program.
Meanwhile, a fourth-quarter earnings surge from Air France-KLM couldn't lift the Paris CAC-40 into the green. The French index was the biggest decliner among the major European bourses.
Tokyo's Nikkei 225 Average closed flat as investors sold recent gainers such as Sony on concern about a pullback in Chinese equities. But losses were limited by a rebound in auto stocks and gains in shares of Japan Tobacco, which rose on an analyst upgrade.
Chinese stocks were lower after a volatile morning trading session in which the Shanghai Composite Index hit a new intraday high before falling back, raising investor concern that a correction could be imminent.
Markets were closed in Korea in observance of a national holiday.