The ramifications of mortgage defaults and the subprime mortgage collapse also have weighed on the market, and there was news in both regards as well.
Beleaguered homeowners hurt by subprime mortgages have been looking for the federal government's help, and a speech by Treasury Secretary Henry Paulsonseemed to bring optimism to investors, but only momentarily.
"Clearly the government is aware that there's between two (million) and four million households at risk here," said David Kotok, of Cumberland Advisors. "Programatically it looks like now we're finally getting into action. We should have done it six months ago."
Stocks struggled for momentum, with declines at blue-chips General Motors , which reported an 11 percent drop in sales, and General Electric keeping the bulls at bay.
Financials were taking a beating after showing signs of life during last week's rally. Shares fell sharply at major lenders including Countrywide Financial as well as government-backed lenders Fannie Mae and Freddie Mac, as well as many investment banks.
Shares dropped at several leading oil majors, including ExxonMobil, Chevron and ConocoPhillips.
In significant corporate news, French telecom and media group Vivendi's announced it will merge its video games unit with Activision in a $9.85 billion deal.
The new industry giant will be called Activision Blizzard and will have annual revenue of $3.8 billion. Activision shares surged on the news.
Also, Agrium said it would buy UAP Holding in a $2.65-billion deal that will make it North America's largest agricultural retailer.
Other stocks making significant moves early on included E-Trade and Research in Motion, both of which stumbled on separate analyst downgrades; NetFlix, which gained on an upgrade, and MetLife, which slipped as it cut 2008 outlook.
Conversely, a slew of home builders saw their shares raise. Posting gains were D.R. Horton , Centex and Lennar, among others.
Verifone Holdings , a San Jose, Calif.-based provider of electronic payment systems, saw its shares lose nearly half their value after it disclosed accounting errors that will force it to restate previous earnings.
In other markets, oilcontinued its decline, retreating from an earlier spurt to fall below $88, a five-week low triggered by beliefs that OPEC, at a meeting later this week, will increase production. However, several prominent OPEC members said the slip in prices might negate a need to generate more supply.
The dollartrimmed gains from last week's rally, slipping from two-week highs against the yen as investors grew cautious due to concerns about the health of financial firms. The yen gained broadly as investors cut exposure to risky carry trades amid expectations of widening financial sector losses tied to the subprime market.
Treasurys rose on safe-haven demand tied to credit worries, although gains were tempered after the manufacturing report.
-- Reuters contributed to this report.