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U.S. equities fell on Thursday on concerns President Trump's recent controversies will make it less likely for Congress to work with him to pass business-friendly legislation.
The Dow Jones industrial average fell 274.14 points, or 1.2 percent, for its biggest drop since May 17, to close at 21,750.73. The index also snapped a four-day winning streak. Cisco Systems was the biggest decliner on the Dow after sales for one of its key segments rose less than expected.
The index started falling earlier on fears that Gary Cohn, a business friendly advisor to the president, could resign his role as director of National Economic Council because of Trump's remarks following the violent protests in Charlottesville, VA.
"This [situation] is definitely disappointing for investors holding out hope for tax reform," Mike Baele, managing director at U.S. Bank Private Client Reserve. "It doesn't mean it's not going to happen, but it certainly" dampens the outlook.
The Dow briefly pared losses when reports indicated Cohn has no plans to resign and it was just speculation. Still, the concern remains that members of Congress and others in the business community would not want to work with the President following the backlash that led Trump to dissolve two CEO advisory forums.
"We've had a lot of things happen recently, so if people want to sell, they have reasons to do it," said Anthony Conroy, president at Abel Noser. "We've also had a couple of really strong days so it's no surprise to see some profit taking."
The S&P 500 pulled back by 1.5 percent to close at 2,430.01— marking its worst with information technology leading all sectors lower.
The Nasdaq composite lagged, falling 1.9 percent to 6,221.91, marking its third-largest daily drop of the year. The Russell 2000, meanwhile, closed below its 200-day moving average — a key technical level — for the first time since June 2016.
Stocks began a brief midday comeback after a tweet from Axios signaled Cohn was staying despite the rumors.
CNBC later confirmed that Cohn will remain with the administration.
"Gary intends to remain in his position as NEC Director at the White House. Nothing's changed," a White House official said.
The White House press office issued a subsequent statement soon after.
"Nothing has changed. Gary is focused on his responsibilities as NEC Director and any reports to the contrary are 100% false," a White House official said.
In an interview with CNBC's "Squawk Box," Yale management expert Jeffrey Sonnenfeld said Cohn's resignation would "crash the markets. "
Despite the Cohn White House denial, the Dow resumed its sell-off and closed at the low for the day anyway.
Investors also kept an eye in Europe, after a van drove into pedestrians in a terror attack in Barcelona.
There is "some Barcelona impact," said Larry McDonald, head of the U.S. macro strategies at ACG Analytics, in an email to CNBC. McDonald added that more concerning were " Washington policy risks coming at markets [in the] next 60 days."
Congress is currently on its summer recess, but they will have to deal with a looming debt ceiling deadline when they return. In 2011, a highly dramatic debt ceiling "crisis," in which Congress failed to raise the debt ceiling until it seemed to become immediately necessary, led Standard & Poor to downgrade the credit rating of U.S. and generated considerable market volatility.
Cisco Systems' stock fell 4 percent after the company said its security business revenue rose less than expected in the previous quarter, negating a quarterly report that was largely in line with expectations.
Shares of Wal-Mart fell 1.6 percent despite the company posting better-than-expected quarterly results.
Overall, calendar second-quarter earnings have been a mixed bag for retailers. Nordstrom posted better-than-expected earnings and sales, sending their stock higher.
"The negative sentiment is spilling across the retail sector," said Kim Forrest, senior equity strategist at Fort Pitt Capital. "It makes people wonder about the health of the U.S. consumer."
In currencies, the euro fell off from a near 2½-year high against the dollar after a summary from the European Central Bank's July 20 meeting showed officials were concerned about an "overshooting" in the currency.
—CNBC's Rebecca Ungarino contributed to this report.