Stocks pared losses in the last few minutes of the session, but closed lower 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 78.41 points, or 0.7 percent, to close at 10,751.27.
American ExpressAlcoa , and Intel declined, while JPMorgan and Verizon rose.
The S&P 500 fell 9.21 points, or 0.8 percent, to 1,137.03. The tech-heavy Nasdaq fell 26.23 points, or 1.1 percent, to 2,344.52. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose more than 5 percent to trade above 23.
Materials, industrials and technology 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 more than 6 percent after news the Justice Department sued the company 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 .