Stocks were on pace to post their largest loss in about a month Monday as investors worried that Europe's debt crisis could spread to Italy and amid ongoing worries over the U.S. budget.
The Dow Jones Industrial Average tumbled, led by JPMorgan and BofA , after ending lower on Friday, but closing higher for the second week.
The S&P 500 and the tech-heavy Nasdaq were also sharply lower. Approximately 97 percent of S&P 500 stocks are trading to the downside today. Despite the sharp decline, the Dow and Nasdaq are still trading higher for the month of July.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, soared almost 20 percent to trade near 19.
All key S&P sectors were lower, led by financials, materials and energy.
President Obama said in a news conference he will meet with Congressional leaders "every single day" until the debt debate gets resolved, adding that he refuses to sign any short-term deficit deal.
This comes after a highly-anticipated meeting over the weekend broke little ground as Obama and the Democrats repeated the need for a "balanced" approach, while Republicans restated their position that tax increases would further burden the already shaky economy.
In Europe, fears intensified over the threat of contagion in the euro zone debt crisis which could force more highly indebted countries to require financial aid. European top officials meet in Brussels to discuss Italy as well as the broader euro zone crisisahead of a meeting of euro zone finance ministers. The euro hit a six-week low against the dollar.
Italy is the euro zone’s third-biggest economy and leaders are desperate to avoid market contagion from Greece.
Italian banks continued to skid, extending last week's losses. European banks trading in the U.S. were also trading lower, including Barclays , ING and Deutsche Bank .
Oil prices tumbledamid worries over the widening euro zone debt crisis and after a drop in Chinese crude imports rekindled fears about a demand slowdown. U.S. light, sweet crude slipped $1.05 to settle at $95.15 a barrel, while London Brent crude fell $1.09 to settle at $117.24.
Energy stocks were also lower across the board, including Chevron and ConocoPhillips .
Investors will be focusing on Alcoa as the aluminum maker is due to report after the closing bell. The Dow component kicks off the unofficial start to second quarter earnings. (Read More: Alcoa May Beat, But Don't Expect a Pop—Analyst)
Meanwhile, Caterpillar slipped even after JPMorgan resumed its coverage on the heavy-equipment maker with "overweight."
ArcelorMittal and Peabody Energy said they have made an offer to buy Macarthur Coal in a bid that values the Australian company at $5 billion.
Amazon.com declined even after Benchmark raised its price target on the online retailer to $246 from $212.
KLA-Tencor and Novellus Systems turned lower even after Citigroup raised its price targets on the firms. Lam Research rose after Citigroup raised its rating on the firm to "buy" from "sell" and boosted its price target to $62 from $43.
Whole Foods was also among the few gainers after the grocery chain was upgraded to "buy" from "neutral" at Goldman Sachs.
Meanwhile, Sirius XM was trading flat following news the satellite radio company will join Nasdaq 100 index on Jul. 15.
Comcast fell even after Brean Murray started coverage of CNBC's parent company with a "buy" rating and a $32 price target.
European shares fell to a two-week closing lowamid continuing euro zone worries.
Coming Up This Week:
MONDAY: Earnings from Alcoa, Chevron interim results
TUESDAY: NFIB small business index, international trade, 3-yr note auction, FOMC Minutes, Campbell Soup analyst meeting
WEDNESDAY: Weekly mortgage apps, import & export prices, Bernanke speaks, oil inventories, 10-yr note auction; Earnings from Yum Brands
THURSDAY: PPI, retail sales, jobless claims, business inventories, 30-yr bond auction, money supply, NPD video games sales; Earnings from JPMorgan and Google
FRIDAY: CPI, Empire state mfg survey, industrial production, consumer sentiment, credit card default rates reported, Dell shareholder mtg; Earnings from Citigroup and Mattel
More on CNBC.com