Winners on the Dow 30 were hard to find, with Travelers and Alcoa turning positive. Merck was the worst performer, as earnings met analyst estimatesbut the company announced substantial job cuts ahead.
While the Washington debt impasse generated some its share of ill will, the government's first reading on economic growth also hammered sentiment.
Gross domestic product for the second quarter came in at an anemic 1.3 percent, worse than the 1.8 percent expectation and likely to raise fears of a double-dip ahead. Moreover, the first quarter's already-weak reading of 1.9 percent was revised to a paltry 0.4 percent, suggesting an economy nearing a double dip despite trillions in liquidity from the Federal Reserve and government stimulus.
That added to an already pessimistic feeling after House of Representatives Speaker John Boehner failed to rally enough support for his plan to raise the debt ceiling before Tuesday’s deadline.
President Obama addressed the nation later in the morning, declaring the Boehner plan dead on arrival and encouraging citizens to pressure their lawmakersto get a deal done. The markets reacted little to the president's speech.
Reflecting the fear overall, gold prices surged to a record close at $1,629 an ounce while prices of Treasurys also were sharply higher, sending the 30-year bond price up close to 2 points and the benchmark 10-year yield down to 2.83 percent.
The CBOE Volatility Index again ramped up, pushing past 25, where it has not been since mid-March.
"The short-term volatility is going to be with us unfortunately," Kevin Karon, strategist at Stifel Nicolaus in Baltimore, said on CNBC. "Unfortunately we're going to be dependent on the news over the weekend."
In other economic news, the University of Michigan consumer sentiment reading came in at 63.7, near consensus, while the Chicago Purchase Managers Index read 58.8, a bit lower than expected.
In earnings, Chevron said it earned $3.85 a share, against expectations of $3.56, though revenue was a bit below estimates, sending shares slightly lower.
Elsewhere, Arch Coal posted earnings of 44 cents per share, well below Reuters estimates of 60 cents, sending shares down nearly 7 percent.
Amgen recorded a profit of $1.37 a share, beating estimates of $1.28, and its shares rose.
In deal news, Allied Healthcare Shares exploded 57 percent on news that it would be purchased by Saga Group for $3.90 a share.