Stocks ended near session lows Monday, posting their largest loss in about a month, as investors worried that Europe's debt crisis could spread to Italy and amid ongoing worries over the U.S. budget.
The Dow Jones Industrial Average fell 151.44 points, or 1.2 percent, to end at 12,505.76. All Dow 30 components closed to the downside, led by by JPMorgan and BofA .
The S&P 500 shed 24.31 points, or 1.81 percent, to close at 1,319.49—slipping into the negative territory for the year.
The tech-heavy Nasdaq tumbled 57.19 points, or 2 percent, to close at 2,802.62. Despite the day's sharp decline, the Dow and Nasdaq are still higher for the month of July.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, soared more than 17 percent to trade above 18.
All key S&P sectors were lower, led by financials, materials and energy.
Investors will be focusing on Alcoa as the aluminum maker is due to report after the closing bell. The Dow component kicks off the unofficial start to second quarter earnings. (Read More: Alcoa May Beat, But Don't Expect a Pop—Analyst)
President Obama said in a news conference he will meet with Congressional leaders "every single day" until the debt debate gets resolved, adding that he refuses to sign any short-term deficit deal.
This comes after a highly-anticipated meeting over the weekend broke little ground as Obama and the Democrats repeated the need for a "balanced" approach, while Republicans restated their position that tax increases would further burden the already shaky economy.
In Europe, fears intensified over the threat of contagion in the euro zone debt crisis which could force more highly indebted countries to require financial aid. European top officials meet in Brussels to discuss Italy as well as the broader euro zone crisisahead of a meeting of euro zone finance ministers. The euro hit a six-week low against the dollar.
Italy is the euro zone’s third-biggest economy and leaders are desperate to avoid market contagion from Greece.
Italian banks continued to skid, extending last week's losses. European banks trading in the U.S. were also trading lower, including Barclays , ING and Deutsche Bank .
Oil prices tumbledamid worries over the widening euro zone debt crisis and after a drop in Chinese crude imports rekindled fears about a demand slowdown. U.S. light, sweet crude slipped $1.05 to settle at $95.15 a barrel, while London Brent crude fell $1.09 to settle at $117.24.
Energy stocks were also lower across the board, including Chevron and ConocoPhillips .