Stocks closed broadly lower as investors pummeled financials on concerns about a potential government levy on banks, while Alcoa's disappointing results stoked unease about the economic recovery.
Technology stocks also helped lead the selloff, with the Nasdaq losing more than 1.5 percent. The major averages were off their lows for the day but threatened to post the market's second losing day of 2010.
President Obama is considering a levy on financial services firms to recoup bailout losses as part of the fiscal 2011 budget he will unveil in February. Investors feared that a levy might hurt bank profits at a time when the sector was trying to recover from the financial crisis, analysts said.
"Talk of a levy creates even more uncertainty for the market and that's the reason for the financials to pull back," said Quincy Krosby, market strategist with Prudential Financial in Newark, New Jersey. "The sooner they can clarify the rumors the better for the market. Investors need to hear the specifics regarding this potential proposal."
Alcoa got earnings season off on a sour note Monday and other prominent companies looked ready to follow suit. The aluminum giant's shares weighed on the Dow, as did a warning from Chevron.
Market also were rattled a bit as China announced an increase in the reserves banks are required to carry, a move tantamount to signaling an interest rate hike.
Though earnings season is in low gear so far, the early disappointments were enough to rattle investors.
Elsewhere, KB Home's earnings actually beat Wall Street estimates, but shares fell after the company's CEO warned that a housing recovery remains uncertain. The SPDRHome Builders ETF fell more than 2 percent.
Chevron had warned Monday that its quarterly earnings would be "sharply lower" than the previous quarter because of weak oil refining margins.