Stocks staged a strong comeback in the final hour of trading Monday, cutting their losses by more than half, following a report that the Greek finance minister official said the debt-ridden nation may be close to a deal with its international lenders, according to Reuters.
Still, stocks ended lower, snapping a five-day winning streak.
The Dow Jones Industrial Average fell 108.08 points, or 0.94 percent, to finish at 11,401.01. The Dow was down more than 250 points in its session lows.
BofA and Alcoa were the biggest laggards on the blue-chip index.
The S&P 500 slumped 11.92 points, or 0.98 percent, to finish at 1,204.09. The Nasdaq slipped 9.48 points, or 0.36 percent, to end at 2612.83, after briefly turning positive.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, jumped near 33.
All major S&P sectors finished lower, led by energy and financials.
Greece is "close to an agreement" with the Troika (EU, IMF and ECB) to receive the next installment of bailout funds, according to Reuters, citing a Greek finance ministry official following an earlier conference call between Finance Minister Evangelos Venizelos and the international lenders.
"Some work still needs to be done...Some measures (for 2011 and 2012) need to be quantified," the official told Reuters on condition of anonymity.
Earlier, the Greek government had said the conference call could last until early Tuesdayand be continued later in the day.
“There’s a constant battle with how serious this contagion is in Europe versus the fundamentals on the ground,” said Jim Paulsen, chief investment strategist at Wells Capital Management. “We’re going to get volatility for a while.”
“The European tends to have greater impact on the U.S. stock market when you get an empty economic calendar and when you don’t have any other data,” noted Paulsen, adding that if the economy picks up and shows a bounce, investors will be less worried over Europe.
European shares finished sharply lower after euro zone leaders said the next tranche of Greece aid will not be given unless the debt-ridden nation meets stricter deficit targets, spreading fears of a possible default. In addition, the widely-anticipated meeting between EU finance ministers broke no new ground over the weekend in dealing with the debt crisis.
President Obama proposed $1.5 trillion in new taxes as a way to reduce the nation's long-term deficit and to slow down the country's increasing national debt. Obama's tax plan mainly targets the wealthy and draws sharp contrasts with congressional Republicans.
Obama's announcement comes just a few days after House Speaker John Boehner ruled out tax increases to lower deficits.
Bank stocks tumbled, including Morgan Stanley and Citigroup . European bank shares including Deutsche Bank and Barclays also plunged sharply.
In corporate news, Netflix turned negative after the firm said it is separating its movie streaming business and its DVD by mail service, which will be called Qwikster, CEO Reed Hastings said in a company blog post. Meanwhile, Goldman Sachs cut its price target on the firm to $270 to $330.
And despite the day's broad selloff, Apple shares bucked the trend, hitting an all-time high.
Meanwhile, UBS raised its outlook on a handful of semiconductors including Texas Instruments, Analog Devices and Maxim Integrated to "positive."
Tyco International jumped after the diversified manufacturer said it will be separating its business into three publicly traded companies.
Caterpillar weighed on the Dow after Raymond James cut its price target on the heavy-equipment maker to "outperform" from a "strong buy" rating.
Transatlantic slipped after the reinsurer said it received a renewed buyout offer of $52 a share in cash from Warren Buffett's Berkshire Hathaway but said the bid was too low.
Meanwhile, Goodrich shares soared to lead the S&P 500 gainers after United Tech said it is thinking of taking over the aircraft component supplier.
Meanwhile, Swiss bank UBS kicked off an internal investigation into the catastrophic failure of its risk systems after raising the amount it lost on rogue equity trades to $2.3 billion.
Among earnings, Lennar gained after the homebuilder said it expects a strong quarter ahead, but posted a 31 percent profit decline in the third quarter amid fewer new home deliveries and higher costs.
On the economic front, homebuilder sentiment dipped slightly in Septemberas the housing market continued to struggle, according to the National Association of Home Builders. Other important housing reports are due throughout the week including housing starts on Tuesday, existing-home sales on Wednesday and FHFA home price index on Thursday.
Investors will be looking ahead to the Federal Reserve's FOMC meeting, which begins Tuesday and will conclude on Wednesday.
Some strategists expect the FOMC to announce measures this week to implement the so-called “Operation Twist,” a tactic to raise interest rates on longer dated treasury securities to help push investors into risker assets.
—Follow JeeYeon Park on Twitter: twitter.com/JeeYeonParkCNBC—
On Tap This Week:
TUESDAY: Housing starts, FOMC mtg begins; Earnings from AutoZone, ConAgra, Oracle, Adobe
WEDNESDAY: Weekly mortgage apps, existing home sales, oil inventories, FOMC mtg announcement, Coca-Cola analyst mtg; Earnings from General Mills, Bed, Bath & Beyond
THURSDAY: Jobless claims, FHFA home price index, leading indicators, Geithner speaks at Global Economy Summit; Earnings from Discover Financial, FedEx, Nike
FRIDAY: IMF/World Bank annual mtg; Earnings from KBHome
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