Stocks held significant losses heading into the close after the dollar rebound prompted investors to take profits following the September rally, and at the start of a week heavy on jobs news and earnings.
The Dow Jones Industrial Average fell more than 90 points. American ExpressAlcoa , and Intel fell, while JPMorgan and Verizon rose.
The S&P 500 and the tech-heavy Nasdaq also fell. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose 6 percent to trade above 23.
Materials, industrials and energy sectors declined.
The dollar's rise against a basket of other major currencies contributed to a broad decline in the market, prompting profit taking in materials and technology stocks, said Michael Sheldon, chief market strategist at RDM Financial.
Overall, the tone to the market has improved as investors seemed to have shrugged off the possibility for another recession, he said, adding Monday's market weakness reflects more technical than fundamental factors.
"I think some investors feel at least technically the market may have run out of steam on a short-term basis," Sheldon said.
The rising dollaralso hit energy prices, with crude oil dropping near $81 a barrelafter last week's 7 percent gain. Gold prices slipped below $1,315 an ounce.
Among energy stocks, Chesapeake Energy slipped after the natural gas producer said it sold future production from some wells in the Barnett Shale field of North Texas for $1.15 billion to an affiliate of Barclays .
In addition, major oil giants ExxonMobil , Chevron and ConocoPhillips were lower.
Tech stocks fell across the board. Microsoft shares dropped after Goldman Sachs downgraded the tech giant to "neutral" from "buy" on concerns of a longer PC refresh cycle and the newer threat from tablets, where Windows does not yet have a presence.
Apple shares fell even after brokerage Ticonderoga started coverage of the iPod maker with a "buy" rating.
Elsewhere, semiconductor chip makers were mostly lower including Micron, AMDand Intel , despite news that global chip sales rose 1.8 percent in August from July, according to the Semiconductor Industry Association. Sales were driven by sales of PCs and wireless products and the expansion of infrastructure in China and India, the association said.
Among materials stocks, Alcoa, U.S. Steel , Allegheny Technologies and NewmontMining shed more than 1 percent each.
Investors are gearing up for the start of earnings season, which unofficially kicks off later this week with results from Alcoa on Thursday. Costco and PepsiCo are also expected to report throughout the week.
Sheldon said this earnings season is likely to be more volatile than the past three or four, as companies deliever more mixed results and mixed guidance.
"While the third quarter earnings season should be positive, it will be less than positive that the past couple of quarters," he said.
American Express shares sank about 7 percent after news the Justice Department sued the company on Monday for allegedly violating antitrust lawover credit card acceptance rules, according to court filings on Monday. The department also announced it had settled with Visa and MasterCard, sending shares of the credit-card processors higher.
In financial news, JPMorgan rose after CEO Jamie Dimon said in an interview with Barron's that the bank should do well under stricter regulation and tougher capital requirements. But Baird cut its 2010 earnings view for JPMorgan as well as Bank of America . Meanwhile, the brokerage raised its 2010 earnings view for Wells Fargo .
Citigroup slumped after analyst Michael Mayo of CLSA Asia-Pacific Markets said execution at the bank remains a concern,although he's not as negative on the company. Mayo met with Citigroup's CEO Vikram Pandit and Chief Financial Officer John Gerspach Friday.
Shares of UBS and Credit Suisse were largely flat after news a Swiss government expert group recommends the banks hold capital in excess of the Basel III requirements. UBS said it is confident it will meet the recommendations.
Shares of Coca-Cola Enterprises nose-dived more than 30 percent after the company gave guidance after Coca-Cola completed the purchase of the distributor's North American operations.
Sara Lee shares jumped to lead the S&P 500 after the The New York Post reported that the foodmaker received an unsolicited offer from private equity firm KKRand could arouse the interest of Anglo-Dutch conglomerate Unilever .
AIG shares were flat after the insurer said it plans to raise almost $15 billionby listing its Asian life insurance unit, AIA Group, in Hong Kong this month, according to a source close to the deal, in what would be the world's second-largest IPO of the year.
This comes after AIG worked out a plan with the U.S. government to repay taxpayers in full last week. AIG also said it will sell two Japanese life insurance units to Prudential Financial for $4.8 billion.
Meanwhile, Ford shares advanced more than 5 percent to their highest level in nearly eight weeks after Morgan Stanley urged investors to take an "overweight" position in the automaker on prospects of a sharp recovery in U.S. auto sales and strong earnings from its finance unit.
Genzyme shares were slightly higher after Sanofi-Aventis launched a hostile bidat $69 a share or $18.5 billion on Monday. Genzyme advised its shareholders to take "no action" on the bid, and said they would issue a formal recommendation within 10 business days.
In the day's economic news, seasonally adjusted index of pending home sales rose 4.3 percent in August, the second monthly increase, but the pace of sales growth declined from a year ago, the National Association of Realtors reported.
Factory orders, meanwhile, fell by 0.5 percent, slightly more than expected, vs. an increase of 0.5 percent in July, because of a downturn in demand for transportation equipment, the Commerce Department reported.
Also, Philadelphia Federal Reserve President Charles Plosser told the Financial Times the Fed shouldn't engage in quantitative easingwithout a clear objective.
At 3 p.m. ET, Federal Reserve Chairman Ben Bernanke holds a town hall for college students in Rhode Island.
Traders will be looking out for comments on currency from delegates at this week’s IMF/World Bank meeting, after Brazil’s finance minister warned last week against the threat of currency wars. None of the world's economic powers wants a strong currency right now and major emerging economies like Brazil know a weaker currency gives their goods a competitive advantage.
On Tap This Week:
MONDAY: Earnings from Mosaic; Fed Chair Ben Bernanke Town Hall.
TUESDAY: ISM non-manufacturing index; Intel CEO Otellini speaks; Earnings from Yum Brands
WEDNESDAY: Weekly mortgage applications; Challenger job-cut report; ADP employment report; weekly oil inventories; CTIA Wireless; Earnings from Costco and Monsanto
THURSDAY: Monthly chain store sales; BoE announcement; ECB announcement; Kansas City Fed Pres Hoenig speaks; Consumer credit; Mosaic shareholder meeting; Earnings from PepsiCo and Alcoa
FRIDAY: Monthly non-farm payroll; Wholesale trade; NY Comic Con; IMF, World Bank annual meetings
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