Stocks sank ahead of a week filled with earnings and economic news centered on the jobs picture and housing, and as the rising dollar prompted profit taking in materials and technology stocks.
The Dow Jones Industrial Average fell about 100 points. Alcoa , Intel, and Microsoft fell. AT&T and JPMorgan rose.
The S&P 500 fell, while the tech-heavy Nasdaq plunged. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose 6 percent above 23.
Materials, technology and industrials sectors fell, while telecom rose.
The dollar's rise on Monday contributed to a broad decline in the market, prompting profit taking in materials and technology stocks, said Michael Sheldon, chief market strategist at RDM Financial.
Against a basket of foreign currencies, the dollar rose nearly 0.5 percent.
Overall, the tone to the market has improved as investors seemed to have shrugged off the possibility for another recession, he said, adding Monday's market weakness reflects more technical than fundamental factors.
"I think some investors feel at least technically the market may have run out of steam on a short-term basis," Sheldon said.
Among materials stocks, Alcoa, US Steel , Allegheny Technologies and NewmontMining all fell.
Technology stocks were lower across the board. Microsoft shares dropped after Goldman Sachs downgraded the stock to "neutral" from "buy" on concerns of a longer PC refresh cycle and the newer threat from tablets, where Windows does not yet have a presence.
Elsewhere, semiconductor chip makers were mostly lower despite news that global chip sales rose 1.8 percent in August from July, according to the Semiconductor Industry Association. Sales were driven by sales of PCs and wireless products and the expansion of infrastructure in China and India, the association said.
Micron , AMDand Intel slumped.
Investors were gearing up for the start of earnings season, which kicks off later this week with results from Alcoa, Costco and PepsiCo.
Sheldon at RDM Financial this earnings season is likley to be more volatile than the past three or four, as companies deliever more mixed results and mixed guidance.
"While the third quarter earnings season should be positive, it will be less than positive that the past couple of quarters," he said.
JPMorgan rose after CEO Jamie Dimon said in an interview with Barron's that the bank should do well under stricter regulation and toucher capital requirements. Meanwhile, Baird cut its 2010 earnings view for the company as well as for Bank of America. The brokerage raised its 2010 earnings view for Wells Fargo .
Shares of UBS and Credit Suisse, meanwhile, were largely flat after news a Swiss government expert group recommends the banks hold capital in excess of the Basel III requirements. UBS said Monday it is confident it will meet the recommendations.
Visa and MasterCard may settle a Justice Department antitrust probe over credit card acceptance rules soon, the Wall Street Journal reported on Sunday, citing people familiar with the negotiations.
Sara Lee's shares rose after a report in the New York Post that the food products company rebuffed an unsolicited offer by KKR.
Shares of Coca-Cola Enterpises nosedived more than 30 percent after the company gave guidance after Coca-Cola completed the purchase of the distributor's North American operations.
Genzyme's shares were slightly higher after Sanofi-Aventis launched a hostile bidat $69 a share or $18.5 billion on Monday. Genzyme advised its shareholders to take "no action" on the bid, and said they would issue a formal recommendation within 10 business days.
A seasonally adjusted index of pending home sales rose 4.3 percent in August, the second monthly increase, but the pace of sales growth declined from a year ago, the National Association of Realtors reported.
Factory orders, meanwhile, fell by 0.5 percent, slightly more than expected, vs. an increase of 0.5 percent in July, because of a downturn in demand for transportation equipment, the Commerce Department reported.
Also, Philadelphia Federal Reserve President Charles Plosser told the Financial Times the Fed shouldn't engage in quantitative easingwithout a clear objective. At 3 p.m. Monday, Federal Reserve Chairman Ben Bernanke holds a town hall for college students in Rhode Island Monday.
The rising dollar also hit energy prices, with crude oil dropping to near $81 a barrel after last week's 7 percent gain. Gold, though, edged higher.
Traders will be looking out for comments on currency from delegates at this week’s IMF/World Bank meeting, after Brazil’s finance minister warned last week against the threat of currency wars. None of the world's economic powers wants a strong currency right now and major emerging economies like Brazil know a weaker currency gives their goods a competitive advantage.
The weakness in the U.S. market also comes after European markets fell on increased worries that European banks may need another bailout in 2011and concerns over sovereign debt.
In Europe, Greece announced a draft budget for 2011 that includes a goal to cut the budget deficit to 7 percent of gross domestic product, creating a giscal gap of EUR16.35 billion, down from EUR18.5 billion.The nation had promised international lenders it would cut the deficit to 7.6 percent.
On Tap This Week:
MONDAY: Ford dealers meeting; Earnings from Mosaic; Fed Chair Ben Bernanke Town Hall.
TUESDAY: ISM non-manufacturing index; Intel CEO Otellini speaks; Earnings from Yum Brands
WEDNESDAY: Weekly mortgage applications; Challenger job-cut report; ADP employment report; weekly oil inventories; CTIA Wireless; Earnings from Costco and Monsanto
THURSDAY: Monthly chain store sales; BoE announcement; ECB announcement; Kansas City Fed Pres Hoenig speaks; Consumer credit; Mosaic shareholder meeting; Earnings from PepsiCo and Alcoa
FRIDAY: Monthly non-farm payroll; Wholesale trade; NY Comic Con; IMF, World Bank annual meetings
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