Stocks closed lower after the chairman of the Federal Reserve said the housing slump is likely act as a drag on to U.S. economic growth, sparking investor concerns.
"It was just last month Bernanke was saying things were contained, but now he's saying housing troubles can spread," said Brian Hicks, president of Wealth Daily, an investment newsletter. "This-flip flop in the last month has really spooked the markets."
"It seems that there are more bodies that will float to the surface and the market is waiting to see what will happen," he added.
Fed Chairman Benjamin Bernanke left his options open on future action on ratessaying a full recovery in markets will take time.
"We had a straight up run in the markets from the time the Fed starts easing which was really August," said Benjamin Pace, equity strategist at Lehman Brothers Private Investment Management. "We're being reminded of why the Fed had to ease."
Rising crude oil prices also added to negative sentiment, while financial stocks remained pressured by lackluster earnings reports.
"Earnings are going to be bad, but looking forward I don't see a recession in the cards and corporate earnngs are going to do fairly well starting in 2008," said Jeremy Siegel, professor of finance at the University of Pennsylvania.
The Dow Jones Industrial Average fell about 80 points, or 0.6%, following a triple-digit loss in Monday's session. The broader S&P 500 and the Nasdaq Composite were also seeing similar declines.
General Motors shares fell after Bear Stearns downgraded the stock to "underperform" from "peer perform," saying the earnings and cash flow gains for 2008 to 2009 from GM's new union contract will be less than expected.
Shares of financial services firms, homebuilders and retailers were among the market's top decliners, along with technology shares.
Wells Fargo, the fifth largest U.S. bank, posted the smallest quarterly profit gain in more than six years.
"There are certain sectors that need to go through more pain, financials being one of them," said Sean Brodrick, senior analyst at MoneyandMarkets.com.
"Fourth quarter earnings could actually be worse and I don’t' think that's priced into the market," said Brodrick. "It looks overbought on a short term basis."
In the energy market, light crude futures closed at a new record high of $87.61 on the New York Mercantile Exchange. Commodities traders have become increasingly concerned about a Turkish invasion in Iraq to chase Kurdish rebels.
"They are scared that if this conflict would grow for any reason, this wouldn't be very good," said independent energy analyst Cornelia Meyer," adding that Turkey was a major transit route for many oil and energy pipes.
Tech stocks were seeing some weakness after a surprise warning from Sweden's Ericsson sent shares in the world's largest mobile handset maker down sharply.
Ericsson and other earnings concerns pulled European stocks down across the board. Asian markets closed down, with the banking sector trading lower after Citigroup said U.S. consumer lending will weaken this quarter.
Tech giants Intel , IBM and Yahoo all report results after the bell.
D.R. Horton also is expected to be weak Tuesday after the nation's largest home builder posed a 39% drop in fiscal fourth-quarter net orders. With the builder's cancellation rate continuing to surge, D.R. Horton said it expects challenges to persist.
The weakness in the housing market also chipped into profits at Wells Fargo and US Bancorp.
U.S. government bond prices gained as investors' worries about riskier credits and stocks re-emerged, rekindling a flight-to-safety bid for Treasuries.
News was better for Dow component Johnson & Johnson, which was trading slightly higher after the company reported third-quarter earnings above Wall Street's estimates and boosted its 2007 earnings forecast.
Biotech bellwether Genentech also reported better-than-expected earnings after the bell Monday, but its drug sales missed forecasts and shares are trading lower.