Stocks came off their worst levels Monday, but still ended lower in extremely thin trading as investors remained nervous that the euro zone's debt problems may spread to other regions.
The Dow Jones Industrial Average fell 74.70 points, or 0.61 percent, to close at 12,078.98, led by BofA and JPMorgan .
The S&P 500 declined 12.06 points, or 0.95 percent to finish at 1,251.79. The Nasdaq slid 21.53 points, or 0.80 percent, to end at 2657.22.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, closed above 31.
All 10 S&P sectors finished in negative territory, led by financials and energy.
“The trading patterns are predicated by the headlines coming out of the euro zone…part of this is the contagion effect—that’s the largest overhanging factor that’s moving markets on a daily basis and it’s the lack of direction that’s creating this volatility,” said David Katz, senior portfolio strategist at Weiser Capital.
German Chancellor Angela Merkel's ruling Christian Democrats Union party just approved the principle of a country exiting from the euro zone, signaling a first step towards the foundation of a two-speed Europe—a region with and without the euro currency.
Meanwhile, Italy's new leader Mario Monti took up the reins as Silvio Berlusconi stepped down from his post over the weekend. Monti is expected to form a government of technocrats—non-politicians—charged with implementing austerity reforms until elections in 2013.
In Greece, new Prime Minister Lucas Papademos—a former central banker who oversaw his country's entry to the euro zone in 2002—will have to win Wednesday's confidence vote in his cabinet before meeting euro zone finance ministers in Brussels on Thursday, state television reported.
“While economic numbers indicate that things are slowly getting better, fundamentals are being ridden by lack of direction in the euro zone," Katz added. "We also have a light-volume issue for the next six weeks or so.”
Credit Suisse fell after Moody's placed the banking giant's long-term rating on review, citing lackluster financial results.
Caterpillar gained after the heavy equipment maker said it will invest nearly $640 million to increase capacity for large mining trucks and tractors at two facilities in the U.S. Meanwhile, Goldman Sachs added the firm to its "conviction buy" list.
Fellow Dow component Bank of America said it reached an agreement to sell about 10.4 billion common shares of China Construction Bankthrough private transactions with a group of investors.
Boeing climbed to lead the blue-chip gainers after the aerospace and defense firm signed a $18 billion dealwith Emirates.
IBM finished flat after billionaire investor Warren Buffett told CNBC that his firm, Berkshire Hathaway , has purchased $10.7 billion worth of the tech giant's stock this year.
Among techs, Salesforce.com closed higher after Citigroup upgraded the cloud computing company to "buy" from "neutral," citing increasing confidence in the firm's long-term profitability potential.
Other Internet companies were trading higher, including Google , Amazon.com , Priceline and Baidu .
On the earnings front, JCPenney slipped after the clothing retailer posted a loss after same-store sales and gross margin declined. The firm also expects same-store sales for the holiday quarter to be flat.
Lowe's advanced after the home-improvement firm reported better-than-expected results and raised its full-year revenue outlook.
Urban Outfitters is scheduled to post earnings after-the-bell tonight. Home Depot and Wal-Mart are slated to report results on Tuesday morning.
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On Tap This Week:
TUESDAY: Fed's Bullard speaks, Fed's Evans speaks, PPI, retail sales, Empire state mfg survey, Fed's Williams speaks, business inventories, Fed's Lacker speaks, Fed's Fisher speaks, Amazon's tablet ships, credit card default rates reported; Earnings from Home Depot, Wal-Mart, Staples, TJX, Beazer Homes, Dell
WEDNESDAY: Weekly mortgage apps, CPI, industrial production, housing market index, oil inventories, Fed's Lacker speaks, Fed's Rosengren speaks, LA auto show; Earnings from Abercrombie & Fitch, Target, Applied Materials, Limited Brands, NetApp
THURSDAY: Housing starts, jobless claims, Philadelphia Fed survey, Fed's Pianalto speaks, Motorola Mobility votes on Google acquisition, GM IPO 1-year anniversary; Earnings from Dollar Tree, GameStop, Ross Stores, Sears, Gap, Marvell Tech
FRIDAY: Leading indicators; Earnings from Heinz
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