U.S. stocks plunged nearly 2 percent or more on Monday with the Dow and S&P 500 wiping out gains for the year on escalating tensions between Greece and its creditors. (Tweet This)
"I think the uncertainty around Greece is just making people skittish and we haven't had a meaningful pullback for some time," said Ben Pace, chief investment officer at HPM Partners. "It's hard for anybody to fight this uncertainty."
"It should be a reasonably isolated situation but we don't know that for sure," he said.
The Dow Jones industrial average closed 1.95 percent lower, falling below its 200-day moving average, with Visa and DuPont leading nearly all blue chips lower. The index is 1.27 percent lower year-to-date.
The Nasdaq Composite fell more than 120 points, or 2.4 percent, to end below 5,000 for the first time since May 13, with biotechs and Apple both more than 1 percent lower. The last time the index dipped below the psychologically key level was June 15.
The S&P 500 declined more than 2 percent for the first time in 2015 with financials tumbling about 2.4 percent to lead all ten sectors lower. The index fell into negative territory for the year, off 0.06 percent.
Stocks extended losses in late-afternoon trade as Greece Prime Minister Alexis Tsipras said the stronger the rejection of the creditor deal, the stronger the Greek hand in the talks. He added that the aim for the referendum is to bring continuation of negotiations with lenders.
S&P downgraded Greece to "CCC-" and said in a Reuters report that the probability of the country exiting the euro zone is now about 50 percent. Earlier, a Greek official told Reuters in midday trade ET that the country will not pay its loan due to the International Monetary Fund on Tuesday.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 36 percent to above 19. The surge is the largest one-day move so far this year.
"The VIX index is continuing to move higher, suggesting investors are reaching a 'Fear Level Crisis,'" Peter Cardillo, chief market economist at Rockwell Global Capital, said in a note. "This level of high volatility is poised to feed on itself, thereby threatening major support levels."
Art Hogan, chief market strategist at Wunderlich Securities, was watching to see if the S&P 500 could hold its 200-day moving average of 2,053.55. The index closed just 4 points above it. Earlier in the day, the index broke through the 2,070 support level that many analysts were watching.
"You've got a lot of influences coming in, some expected and some unexpected. In the aggregate that's going to keep alot of pressure on markets both internationally and domestically," Hogan said.
In addition to capital controls in Greece, Puerto Rico's governor said the commonwealth cannot pay its debt of about $72 billion.
"I think that's obviously another issue," said Quincy Krosby, market strategist at Prudential Financial. "I think it's probably ancillary to Greece right now—part of the cross currents."
Mainland Chinese markets entered bear market territory, with the Shanghai Composite closing 3.3 percent lower on Monday despite initial attempts at gains following the central bank's rate cut over the weekend.
"For the most part the United States and U.S. equities are pretty well insulated from the crisis in Greece," said Jack Ablin, chief investment officer at BMO Private Bank. He said the issues in Europe are more political.
Stocks pared opening losses in mid-morning trade. It's "better than expected, not as bad as possibly feared," said Robert Pavlik, chief market strategist at Boston Private Wealth. "This is a knee-jerk reaction and one that will work itself out. ... In the grand scheme of things (Greece) is not a big deal for the global economy."
Pavlik said the declines presented more of a buying opportunity, especially in financials, consumer discretionary, health care and technology.
"The U.S. market has held up fairly well compared with everything overnight," Krosby said. "(Currency) hasn't been screaming 'Armageddon,' nor has the bond market."
The dollar reversed to trade more than half a percent lower, while the euro turned positive to top $1.12. Earlier, the euro fell below $1.10 to a one-month low.
Treasury yields declined, with the U.S. 10-year yield near 2.32 percent, while the 2-year yield was 0.64 percent in morning trade. The German 10-year bund yield was 0.80 percent.
In what Ablin termed an indication of "failing leadership," Greek Prime Minister Alexis Tsipras called a referendum for July 5, in which Greeks will vote on whether to accept the austerity rescue package previously offered by Athens' creditors.
The European Central Bank is expected to continue limited support for local banks until the July 5 referendum despite rejecting the country's request on Sunday for 6 billion euros of extra emergency funding, people with knowledge of the matter told Reuters.
Greece's banks and main stock exchange were closed Monday and were expected to remain closed for the week to prevent a run on financial institutions. The central bank also recommended a 60 euro ($66) limit on withdrawals from cash machines. An official later said the banks would reopen on Thursday.
Read MoreLive blog on Greece
The closures came after reforms-for-financial aid talks between Greece and its creditors broke down and the European Central Bank capped emergency funding to Greek banks on Sunday.
Without a deal, Greece is set to default on its 1.5-billion-euro ($1.66 billion) debt due to the International Monetary Fund Tuesday.
China's Premier Li Keqiang said on Monday in a Reuters report he wanted to see a strong euro, urging euro zone officials to keep Greece in the union. When asked whether China could provide financial assistance to Greece, Li said: "China is ready to play a constructive role."
Traders also weighed a mid-morning tweet from Bill Gross of Janus Capital that said, "Reparations and austerity for Greece will cost the EU big-time."
"One of the other issues exacerbating the issue particularly in Greece is liquidity. We're going to see outsized movements in either direction. Liquidity is going to only get worse this week with Friday's close (for the holiday)," Ablin said. "Until (nonfarm payrolls) we're going to be mired in headlines."
The only economic data out Monday was pending home sales, which showed an increase of 0.9 percent in May, slightly below expectations.
Investors will closely watch Thursday's nonfarm payrolls report for further indications on the timing of a rate hike. Markets are closed Friday in observance of the July 4 holiday.
Lance Roberts, general partner at STA Wealth Management, said investors should watch weekly gains and losses more than daily market moves.
"... Even if we break below 2,080 today, as long as we close above that level by the end of the week,then nothing has changed. A close below that level will suggest that we are beginning a more significant correction toward the January lows of 2000 to start with," he said.
The Dow Jones Industrial Average closed down 350.33 points, or 1.95 percent, at 17,596.35, with DuPont and Visa plunging nearly 3 percent to lead all blue chips lower.
The Dow transports ended down 1.96 percent.
The closed down 43.85 points, or 2.09 percent, at 2,057.64, with financials falling 2.44 percent to lead all 10 sectors lower.
The Nasdaq closed down 122.04 points, or 2.40 percent, at 4,958.47.
About nine stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 875 million and a composite volume of 3.65 billion in the close.
Crude oil futures settled $1.30 lower at $58.33 a barrel on the New York Mercantile Exchange. Gold futures settled up $5.80 at $1,179.00 an ounce.
In corporate news, coal stocks such as Peabody Energy surged on a U.S. Supreme Court ruling against the Obama administration that said it failed to consider costs when deciding to regulate mercury pollution from power plants.
Gannett–The company splits in two, effective Monday. The existing parent company is renamed Tegna and will own 46 broadcast stations as well as the Cars.com and Careerbuilder.com websites. The newspaper operation, including USA Today, are spun out into a new company which will carry the Gannett name and ticker symbol.
—CNBC's Peter Schacknow contributed to this report.
On tap this week:
Deadline for Iran nuclear talks
9 a.m.: S&P/Case-Shiller home prices
9:45 a.m.: Chicago PMI
10 a.m.: Consumer confidence
6 p.m.: St . Louis Fed President James Bullard
Vehicle sales released by manufacturers
8:15 a.m.: ADP employment
9:45 a.m.: Manufacturing PMI
10 a.m.: ISM manufacturing, construction spending
10:30 a.m.: Oil and gasoline inventories
8:30 a.m.: Initial claims, employment report
10 a.m.: Factory orders
10:30 a.m.: Natural gas inventories
Fourth of July holiday
Bond and stock market closed
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