Stocks declined Monday as the insurance and financial sectors led blue chips lower and techs benefited from a slew of deal news.
The Dow Jones Industrial Average, coming off its worst week in nearly five years, retreated after Dow Jones announced a shake-up in the blue-chip index. The S&P 500 index and tech-heavy Nasdaq also fell.
"We've got a lot of hand-wringing about what's going on in the financial markets," Thom Hall of the Financial Strategies Institute told CNBC Monday. "I think Main Street is plugging along, it's just Wall Street that's having some heartburn right now."
"What's scary about today is that a lot of people have money in cash or on the sidelines in money markets," said Peter Yastrow, a strategist at MF Global Market. "We always assume that those investments are 100 percent safe and I'm afraid there's going to be a lot more than hand-wringing if people find out that the money they have in cash is actually at risk."
AIG, the biggest drag on the Dow, fell sharply after the company's auditors said it had failed to account properly for derivatives related to risky debt known as collateralized debt obligations.
Before the opening bell, Dow Jones said Bank of America and Chevron will be added to the Dow Jones Industrial Average. Altria and Honeywell will be removed. The changes take effect Feb. 19.
"The catalyst for these changes is the restructuring in progress at Altria, which will result in a much smaller and more narrowly focused company," Marcus W. Brauchli, the managing editor of the Wall Street Journal, said in a statement. Brauchli, who overseas the composition of the Dow, said Honeywell is being dropped because it is the smallest of the industrials in terms of revenue and earnings. He added that the role of industrials in the overall stock market is on the decline.
As for the addition of Bank of America and Chevron, Brauchli said, "we saw that the financials industry was under-represented -- notwithstanding the current turbulence -- and that the oil and gas industry's growing importance to the world economy called for another representative to join Exxon Mobil Corp."
Upward momentum in the market was curbed by concerns about a deeper-than-expected global economic slowdown after finance leaders from the Group of Seven major economies said conditions may worsen as debt-laden banks clamp down on credit.
"I believe we're stuck in a range," Richard Suttmeier from Rightside.com told "Worldwide Exchange." Still, some investors are likely to take advantage of low valuations. Suttmeier said he sees 15 out of 30 Dow components ready to buy. "I am seeing more and more tech stocks ready to buy now," Suttmeier added.
Analysts said Microsoftis likely to raise its bid for Yahoo after Yahoo rejected the software giant's $44.6 billion offer, as widely expected. RBC Capital Markets downgraded its rating on Microsoft to "sector perform" from "outperform" and cut its price target on the stock to $31. from $40.
Meanwhile, Motorola and Nortel Networks are said to be considering combining their wireless-networking units, the Wall Street Journal reported.
It's an important week for the telecommunications sector as the World Mobile Congress kicked off in Barcelona and a slew of firms, eager to push their products and services out ahead of the competition, issued announcements.
Nokia , the world's largest cell-phone maker, on Monday unveiled four new multimedia-phone models, including successors to its top N95 and N73 models. The Finnish company also launched its new free media-sharing service "Share on Ovi." Nokia said it had no plans to use Microsoft's Windows Mobile operating system, making it the only one of the world's leading cell-phone makers to snub Microsoft's system.
Google launched its Android software for mobile phones, which enables users to access the Internet via the mobile telephone.
Apple shares rose in premarket trading after Citigroup added the tech giant to its top-picks list. Analyst Richard Gardner said concerns over reductions to iPod and iPhone build plans are already prices into the stock. He said he sees "significant offsets" to sluggish first-half 2008 iPod unit growth, including continued strong demand for PCs, lean inventories, further expansion of Apple's relationship with Best Buy and the introduction of MacBook Air.
In merger and acquisition news, people familiar with talks between Delta and Northwest Airlines could reach a merger agreement as soon as this week, Bloomberg.com reported.
On the earnings front, Hasbro, the world's second largest toy maker, reported on Monday that its earnings rose 24 percent as sales shot up 16 percent from a year earlier.
Larger rival Mattel recently announced a 15 percent profit increase but faced negative publicity because of its recalls of millions of Chinese-made toys tainted with lead.
There are no major economic indicators due out Monday.
-- Reuters contributed to this report