Bank of America, Citigroup and Goldman Sachs were all down more than 1 percent, dragging down the major indexes. Financial sector declines come as rates continue to trickle downward, with the yield on the U.S. 10-year Treasury note falling to 2.05 percent Thursday. The 10-year note yield dipped below the critical 2.1 percent threshold Tuesday.
Financials are losing their summer gains as interest rates decline. Goldman, which reached its highest level since March on Aug. 7, has since fallen more than 7 percent since then, mirroring the 20 basis point slip in the 10-year Treasury note yield.
"We're walking away from the prospect of a December rate hike," said Art Hogan, Wunderlich Securities chief market strategist. "There certainly is a correlation between banks moving lower and Treasurys moving higher. ... You're seeing an equal but opposite reaction."
"We have a Fed that will eventually start quantitative tightening. ... That's also certainly part of it," he added.
One-month comparison: Goldman Sachs stock price vs. US 10-year Treasury yield
Insurance stocks also sank as investors grew more concerned over exposure to Hurricane Irma. Shares of XL Group fell over 5 percent Thursday, while Chubb fell another 2.5 percent to add to its 10 percent decline in the last 30 days amid the Hurricane Harvey destruction.
"Irma is front and center in my mind," said Jack Ablin, BMO Private Bank chief investment officer. "It could potentially spur selling ahead of the weekend." Ablin added that catastrophes along Florida's east coast could spell meaningful economic damage.
Both the health care sector and its ETF posted stronger numbers, with the SPDR ETF (XLV) setting a new all-time high, advancing 1.1 percent.
Stocks failed to get a lift out of some bipartisan agreement in Washington.
The Senate on Thursday approved a package that includes Hurricane Harvey recovery funds, a debt ceiling extension and temporary government funding. The package came after President Donald Trump signaled his approval for the Democratic plan on Wednesday. The unexpected agreement between the president and leading Democrats previously boosted stocks.
"For the most part, there's nothing new coming out of D.C.," said Boston Private chief market strategist Robert Pavlik. "What you're seeing is a market that's trying to find its level. On Tuesday there was a lot of movement into defensive areas, while yesterday there was movement back into financials and tech. It's this tug back and forth."
The dollar index hit low of 91.405, its lowest level since Jan. 6, 2015, as the euro surged against the greenback.
Driving the move were comments from European Central Bank President Mario Draghi, who hinted at starting to reduce the central bank's bond-buying program as early as next month. Draghi also gave an upbeat forecast on the region's economy.
The dollar fell despite comments from Cleveland Fed President Loretta Mester, who said that the gradual increases in the fed-funds rate will be needed to sustain the expansion and mitigate risks.
"The gradual approach to normalization allows for the kind of fluctuations we've seen in the data on the economy and inflation without having to change our strategy," she said. "We'll need to keep a watch on whether this wait- and-see attitude spreads and begins to weigh more broadly on spending and investment decisions."
On the data front, the number of Americans filing for unemployment benefits jumped to its highest level in more than two years last week amid a surge in applications in hurricane-ravaged Texas, but the underlying trend remained consistent with a firming jobs market.
Initial claims for state unemployment benefits soared by 62,000 to a seasonally adjusted 298,000 for the week ended Sept. 2, the highest level since April 2015, the Labor Department said on Thursday.
—CNBC's Gina Francolla contributed to this report. CNBC is a unit of Comcast NBCUniversal.