Stocks tumbled Monday as a key manufacturing gauge came in weaker than expected and the dollar made a comeback.
Major indexes were down more than 2 percent, with the Nasdaq the hardest hit of the three, down nearly 3 percent.
And the CBOE Volatility Index, widely considered the best gauge of fear in the market, pushed above 30.
Wall Street had an impressive roll heading into the new week: The Nasdaq has chalked up weekly gains in 13 of the past 14 weeks, while the Dow and the S&P 500 had risen in 12 of the past 14 weeks. All three indexes were positive for the year as of Friday's close and the Dow and S&P were on track for their best quarterly gains since the fourth quarter of 1998.
But weak economic data and the strong dollar threw water on the rally.
The New York Empire Manufacturing Index fell to minus-9.41in June from minus-4.55 in May, indicating difficult times in the sector and presenting a headwind for economic growth.
Investors look to the New York report as a precursor to what's to come in the Philly Fed report, due out Thursday, and the national reading from the ISM, due out next week.
But one economist said the reaction may have been overblown.
"[E]ven when these indices manage to move in the same direction, the relative magnitude of the changes often varies greatly. We therefore do not think that the Empire index adds any real worth to the economic knowledge base, and it receives more market attention than warranted," Joshua Shapiro, chief U.S. economist at MFR Inc., wrote in a note to clients.
U.S. Treasury Secretary Timothy Geithner said the financial system was beginning to thaw but that the economic recovery would be slower than usual and that unemployment would likely continue to rise.
"Recovery will be slower than we would normally see," Geithner said at an economic summit sponsored by Time Warner."This is still going to be an exceptionally challenging time for business and consumers."
International Monetary Fund chief Dominique Strauss-Kahn took it a step further, saying the worst may be yet to come for the global economic crisis.
The dollar rebounded against major currencies including the euro, yen and pound.
And crude oildropped below $70 a barrel, after trading above $73 last week.
All 30 Dow stocks were lower, led by commodity and heavy industrial stocks: Alcoa , Caterpillar and Boeing were the three biggest decliners.
And Wal-Mart took a hit after Goldman Sachs cut its rating on the stock to "neutral" from "buy," saying it doesn't see a lot of positive catalysts to drive shares higher in the near term amid cost pressures and tough comparisons.
Meanwhile, Goldman added Wal-Mart rival Target to its "conviction buy" list, saying it expects significant earnings momentum for the retailer in the fourth quarter.
Meanwhile, financial institutions may be facing tougher capital and liquidity requirements under new rules designed to avoid another financial crisis, the US administration revealed Monday.
And Forbes CEO Steve Forbes told CNBC that the Federal Reserve should stop buying government debt and move its attention to consumer focused areas of the credit market.
Tech stocks were among the biggest decliners, with the Philadelphia Stock Exchange semiconductor index down nearly 3 percent.
Microsoft and Yahoo succumbed to the selling pressure, after gaining slightly in the morning session.
For Microsoft, the buzz about Bing continued, like this Tech Crunch piece that explains how Bing outperformed Google in Laker results this weekend. Still, it's going to be tough for Microsoft to translate such rave reviews into market share, given Google's near synonymity with search.
Among the day's few gainers were: Visa , MasterCard, Coach , DelMonte and Buffalo Wild Wings .
Still to come: The National Association of Home Builders issues its monthly reading of builder sentiment at 1 pm.
MONDAY: Obama meets in Washington with G8 head on global economic regulations; Obama speaks on health-care reform; airline-safety summit; NAHB housing index
TUESDAY: Housing starts; PPI; industrial production; Obama hosts South Korean leader to discuss North; Madoff sentencing; Earnings from Best Buy, Smithfield Foods, Adobe
WEDNESDAY: Bernanke speaks; weekly mortgage applications; CPI; crude inventories; Obama to outline plans for financial reform; Earnings from FedEx
THURSDAY: Weekly jobless claims; leading indicators; Philly Fed index; Earnings from Research In Motion
FRIDAY: Quadruple witching
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