Stocks clawed back from session lows ahead of a crucial vote in Washington on the debt deal, but still ended lower Monday following a dismal manufacturing report in addition to renewed worries over some euro zone countries.
The Dow Jones Industrial Average pared most of its losses, but still declined 10.75 points, or 0.09 percent, to finish at 12,132.49, ending lower for the seventh-consecutive session.
Home Depot and Merck were the biggest laggards on the index.
The S&P 500 slipped 5.34 points, or 0.41 percent, to end at 1,286.94. The S&P traded below its 200-day moving average of 1284.34 for most of the session, but rebounded in the final hour.
The tech-heavy Nasdaq slid 11.77 points, or 0.43 percent, to close at 2,744.61.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, traded near 23.
Most 10 S&P sectors were negative, led by health care and consumer discretionary.
Stocks tumbled in the first 30 minutes of trading after a report that said the pace of growth in the U.S. manufacturing sector slowed more than expected in July, according to the Institute for Supply Management.
"Unbeknownst to what many of our trusted lawmakers may like to believe, the poor readings on the economy are not exclusive to the debt drama," Todd Schoenberger, managing director of LandColt Trading told CNBC. "If they woke up this morning thinking trading would be a cakewalk and investors would parade Congress on their shoulders as a result of this so-called deal, they are clearly mistaken."
The dismal news follows the government's first reading on GDP last Friday, which came in at an anemic 1.3 percent, raising fears of a double-dip ahead.
On the debt deal front, President Obama announced a compromise that would shrink the deficit by around $2.4 trillion in the next 10 years. (Read More—Budget Deal a 'Joke,' Obama Is 'Incompetent': Trump) Vice President Joe Biden predicted passage of a bill to increase the nation's debt ceiling.
The Senate and the House of Representatives are due to vote Monday evening and the bill could be signed by Obama in time to avoid a technical default by the U.S. on August 2, when the Treasury runs out of funds.
On the tech front, Apple gained after Piper Jaffray said the firm's survey points to a "significant pent up demand" for the next iPhone, particularly at Verizon . And Canaccord Genuity raises its price target on the company to $515 from $510.
In earnings news, HSBC gained after the banking giant beat earnings forecasts and hiked dividends. In addition, the firm announced it is cutting 30,000 jobs as part of its cost reduction program.
Humana slipped even after the health insurer posted a 35 percent surge in profit.
No major earnings are expected after-the-bell tonight, but Pfizer , Toyota and Barclays are scheduled to report Tuesday morning.
Healthcare stocks tumbled amid worries that the debt-ceiling deal would lead to cuts in healthcare spending for federal programs such as Medicare. Sun Healthcare , Kindered Healthcare and Skilled Healthcare tanked after Medicare said it will cut payment rates to skilled nursing facilitiesby 11 percent next year.
Also on the health care front, Teva Pharmaceutical plunged after the firm failed its second late-stage clinical trial. Meanwhile, rival Biogen Idec rallied.
On the M&A front, Peabody Energy and ArcelorMittal launched a hostile bidfor Macarthur Coal.
Volume was better than usual with the consolidated tape of the NYSE at 4.31 billion shares, while 1.1 billion shares changed hands on the floor.
Oil prices finished mixed in volatile trade, with U.S. light, sweet crude falling below $96 a barrel and London Brent crude finishing near $117.
The dollar dropped to a fresh low against the Swiss franc and a 4-1/2-month trough versus the yen. Meanwhile, the Japanese government is preparing a currency intervention to weaken the yen and has discussed additional monetary easing, according to Japan's Nikkei newspaper.
Also on the economic front, construction spending gained for a third straight month in June.
European closed lower, as euro zone peripheral worriesdragged banks lower, offsetting optimism that the U.S. will raise the debt ceiling and avert a default.
Coming Up This Week:
TUESDAY: Personal income & spending, auto sales; Earnings from Pfizer, Toyota, Barclays, CBS
WEDNESDAY: Weekly mortgage apps, Challenger job-cut report, ADP employment report, factory orders, ISM non-mfg index, oil inventories; Earnings from Comcast, MasterCard
THURSDAY: Weekly jobless claims, money supply, chain-store sales; Earnings from GM, AIG, Kraft, Sunoco
FRIDAY: Employment situation, consumer credit; Earnings from P&G
More From CNBC.com: