Stocks staged a late-day comeback from session lows Tuesday after traders were disappointed by comments from Sarkozy and Merkel, but the gains were not enough for the market to finish in positive territory.
The Dow Jones Industrial Average declined 76.97 points, or 0.67 percent, to close at 11,405.93, led by BofA and Alcoa . The Dow was down 190 points in its session low.
Home Depot and Wal-Mart led the blue-chip gainers.
The S&P 500 slumped 11.73 points, or 0.97 percent, to end at 1,192.76 and the Nasdaq fell 31.75 points, or 1.24 percent, to finish at 2,523.45.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, ended near 33.
Most S&P sectors were lower, led by financials and energy. The banking sector has alternated between gains and losses every day since last Monday.
Stocks hit session lows after French President Nicholas Sarkozy and German Chancellor Angela Merkel agreed to float proposals for a tax on financial transactions and as both leaders indicated that the size of the EFSF (European Financial Stability Facility) is sufficient.
"This tax will not be well received," said Todd Schoenberger, managing director LandColt Trading. "German citizens are going to be taxed to pay for some other nation's profligacy?! Yeah, that's gonna go over real well—Don't be surprised to see European bourses get slammed tomorrow."
Sarkozy and Merkel also said they want a "true European economic government" that would consist of the heads of state, but ruled out issuing Euro bonds to fix the debt crisis, disappointing traders.
Meanwhile, Euro zone growth for the second quarter slowedto 0.2 percent quarter-on-quarter, below forecasts for growth of 0.3 percent and at the slowest pace since 2009. A much weaker than expected GDP figure for Germany in particular weighed on European markets.