The Dow Jones Industrial Average tumbled 185.23 points, or 1.45 percent, to end at 12,570.95, dragged by Bank of America ndHome Depot. Cisco was the only gainer on the blue-chip index. Dow was down more than 200 points in its session low.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, jumped above 17.
All key S&P sectors closed in negative territory, led by industrials nd banks.
The Federal Reserve signaled that it will likely launch a new bond buying program next year when the Operation Twist program expires, according to minutes from the central bank's Oct. 23-24 policy meeting. In addition, the minutes also revealed that officials felt their decision to launch a third round of quantitative easing has improved financial conditions and helped support the housing recovery.
President Barack Obama held his first news conference since his re-election, saying that he is confident that Republicans can join Democrats in avoiding the fiscal cliff. While Obama said he was "open to new ideas" on tax rates, he also insisted a modest increase in taxes on the wealthy "will not break their backs" and will not impinge on business investment.
Major averages have declined since last week as investors remain cautious with renewed worries over Europe's debt crisis and the U.S. fiscal cliff—large, mandated tax hikes and spending cuts that start to take effect next year. Analysts say that the failure to reach a deal in Congress could tip the U.S. economy into recession. (Read More: How 'Fiscal Cliff' Could Hurt You)
Major U.S. Indexes
Meanwhile, Israel launched a major offensive against Palestinian militants in Gaza, killing the military commander of Hamas in an air strike. Oil prices rose more than 1 percent to above $86 a barrel.
European shares ended sharply in the red as anti-austerity strikes across southern Europe, and a lack of resolution on Greek debt, put the euro zone crisis back in the spotlight.
Factory output in Europe fell by the most in nearly four years in September, but that news was tempered by some bright spots in corporate earnings.
Facebook jumped as the social-network giant's lock-up expired, freeing up about 804 million shares. Separately, Zynga said its CFO has left the social gaming company for an executive position at Facebook. Piper Jaffray cut its price target on Zynga to $2.50 from $3.
Abercrombie & Fitch surged after the teen clothing retailer posted a higher quarterly profit, thanks to improved demand in international markets, prompting the company to raise their yearly earnings guidance.
Home Depot pulled back following a rally in the previous session. At least three brokerages raised their price target on the home-improvement retailer, while Raymond James cut its rating on the stock to "market perform."
Mosaic declined after the fertilizer producer cut its sales forecast for phosphate and potash, because of uncertainty in its China and India markets. Canaccord Genuity downgraded the stock, along with rival Potash to "hold" from "buy."
On the economic front, retail sales dipped in October, according to the Commerce Department, while producer price index also slipped in October, according to the Labor Department.
Meanwhile, business inventories rose to a record $1.61 trillion in September, according to the Commerce Department, but were flat for a second month when excluding automobiles.
Weekly mortgage applications rebounded last week, rebounding after Hurricane Sandy depressed applications on the East Coast, according to the Mortgage Bankers Association.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
On Tap This Week:
THURSDAY: CPI, jobless claims, Empire state mfg survey, Philadelphia Fed survey, oil inventories, Fed bank of Chicago annual conf., credit card default rates reported; Earnings from Target, Wal-Mart, Viacom, Gap, Dell
FRIDAY: Treasury international capital, industrial production, e-commerce retail sales; Earnings from Foot Locker, JM Smucker, Ann
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