Stocks finished lower in a choppy session that was overshadowed by concerns about the housing slowdown and a meltdown in the subprime mortgage industry.
"There seems to be some underlying fear in the marketplace because of this subprime debt," a trader told CNBC.com. "A number of analysts defended Bear Stearns stock today, but if traders thought the worst was over, this stock would be up five bucks."
"The market is looking for direction and it seems like everyday recently, the market has been hit with developments it doesn't like," Brian Hicks, president of Wealth Daily, told CNBC.com. "I think the market is looking for some light at the end of the tunnel and it looks like the housing problem will continue longer than expected."
Stocks lost ground across the board, with healthcare the only S&P 500 sector showing any significant gain.
Merck was the biggest percentage gainer on the Dow, but it also pared earlier gains. The major averages turned lower after the industrial, financial and information technology sectors lost ground. Energy shares led the decliners, losing ground after oil prices fell below $68 a barrel.
"The financials tend to lead the market down and that's what they were doing today," said Robert Albertson, chief strategist at Sandler O'Neill. "I think it goes well beyond subprime. There is clear end-of-cycle credit unraveling that I'm seeing and I think it makes financing very difficult in the future."
The session started in choppy fashion with all three of the major averages moving back and forth in positive and negative territory.
"Obviously, we've been volatile and I think, more than anything, that's due to the ongoing shakeout in credit markets," Mike Malone, equity sales and trading analyst at Cowen & Company, told CNBC.com. "I think the market wants to go up, but there are still some ongoing concerns that are preventing people from bidding the market up substantially."
The U.S. Commerce Department said new home sales for May fell 1.6% to a lower-than-expected 915,000 units. Analysts surveyed by CNBC and Dow Jones were expecting a decline to an annual rate of 925,000 units from 981,000 units.
Consumer confidence also came in below expectations. The Conference Board's measure of June consumer confidence was 103.9, below the 106 expected by economists.
"We're in a period of time where there's a news story one day that makes the market go up and a news story the other day that makes it go down," said Ron Kiddoo, chief investmenf officer at Cozad Asset Management. "There's no real clear direction now in the market. I think we're going to see this choppiness through the remainder of the summer."
Treasury prices edged lower, sending yields higher.
Meanwhile, the U.S. Securities and Exchange Commission testified before Congress for the first time in 10 years. Five SEC commissioners will give evidence in front of the Congressional House Financial Services Committee, which is concerned that the market watchdog is too aligned to business and not protecting individual investors.
The SEC has opened about a dozen investigations in connection with complex products in connection with complex products in which debt is bundled together, according to SEC Chairman Christopher Cox.
Enforcement was on the agenda, following a week of uncertainty surrounding the future of two Bear Stearns-owned funds which may cost the bank, one of the nation's biggest mortgage underwriters, as much as $1.6 billion.
Lehman Brothers is downplaying fears that Bear Stearns' troubles will materially hurt the company's earnings.
"It's a question of whether subprime becomes a contagion for the whole market and other than the psychological fear of it, I just don't see that happening," said Zachary Karabell, chief economist and portfolio manager for Fred Alger Management.
Bearish sentiment was also fueld after shares of the Blackstonefell below its offering price of $31. There are concerns about proposed legislation that would raise taxes on private equity.
Kroger, the largest U.S. grocery chain, posted a higher quarterly profit Tuesday as it attracted shoppers with remodeled stores featuring a better selection of products. Profit was $336.6 million, or 47 cents per share, in the fiscal first quarter, compared with $306.4 million, or 42 cents per share, a year earlier. However, shares of the stock fell because profits still failed to meet Wall Street expectations.
There was more M&A news today. U.S. chemicals group Huntsman Corp. agreed to a $25.25 per share takeover offer by private Dutch company Basell Holdings. The deal is valued at $9.6 billion. Shares of Huntsman soared on the announcement.
In energy markets, New York light sweet crude futures fell more than a dollar to trade below $68 a barrel ahead of weekly oil inventory data due out Wednesday. Traders expect crude oil inventories rose last week.
On Monday, Exxon Mobil and ConocoPhillips rejected a deal to stay in multi-billion dollar projects that Venezuela is nationalizing, increasing the likelihood that the oil companies will leave the country, according to sources close to negotiations.
European Stocks Close Lower
European stock markets closed lower Tuesday, as fresh merger and acquisition news failed to distract investors from weakness in the U.S. subprime mortgage market.
The London FTSE-100, the Paris CAC-40 and the Frankfurt DAX all finished lower.
The future of ABN Amro's U.S. banking unit LaSalle was in focus as a law professor advising the Dutch Supreme Court said an earlier ruling that froze the $21 billion sale of LaSalle to Bank of America should be overturned.
The opinion of Advocate General Vino Timmerman could be an indication that the court will allow ABN to sell the unit, leaving Barclays of the U.K. in pole position to acquire the the Dutch bank for $85 billion.
On the acquisition front, Iberdrola said it is set to buy Energy East for $4.5 billion, in an attempt to expand its operations in the U.S. Shares of the Spanish energy company fell on the news.
And Swiss drugmaker Roche continued to pursue a takeover of Ventana Medical Systems, saying it still aimed to reach an agreement over the $3 billion hostile bid. Roche shares were flat.
Meanwhile, shares in BAE Systems slumped on news the U.S. Department of Justice began a formal investigation into the defense and aerospace company's compliance with anti-corruption laws.
Asia Mostly Lower
It was another poor session for Asian markets as they continued to track the U.S. decline over concerns of a subprime mortgage fallout.
But a closely watched IPO in China defied the market downturn. Shares of China COSCO Holdings more than doubled on its debut in the Shanghai A-share market. The stock's domestic IPO drew a record $124 billion in subscriptions.
Still, this wasn't enough to support the Shanghai Composite Index which fell nearly 2% to 3,863.81 in afternoon trading.
The Nikkei was lower after weaving in and out of positive territory.
Matsui Securities jumped 4% on reports Mitsubishi UFJFinancial Group will buy a 15% stake in the brokerage next March.
Shares of Goodwill Group came back into focus, sliding 9% after the health service provider said it will issue 400,000 new shares to reinforce its shareholders' equity.
In South Korea, the KOSPI slipped for a third session, as exporters worry over the health of the U.S. economy and a potential interest hike in China.
But a UBS stock upgrade for Korea Exchange Bank cropped its three-day losing streak. The brokerage said KEB will attract a premium when U.S. fund Lone Star sells its remaining stake in the lender.
Down under in Australia, the S&P/ASX 200 was little changed. Shares of Babcock & Brown Infrastructure advanced after it revised a takeover offer for U.S. utility giant Northwestern Energy. A U.S. state regulator had blocked its initial US$2.2 billion bid.
Finally, South-east Asian markets were mixed, as a new lucrative contract for Sembcorp Marine in Singapore failed to lift the Straits Times Index.