Stocks Log Lowest Close in Over a Year

Stocks kicked off the new month and quarter with a thud Monday, led by financials, as worries over Greece continued to spook investors and overshadowed a pair of better-than-expected economic news.

All three major averages closed at their lowest levels in over a year and the day's decline marks the worst start to October since 1998.

The Dow Jones Industrial Average tumbled 258.08 points, or 2.36 percent, to finish at 10,655.30, led by Bank of America and Alcoa .

Wal-Mart was the only gainer on the blue-chip index.

The S&P 500 dropped 32.19 points, or 2.85 percent, to end at 1,099.23. The Nasdaq plunged 79.57 points, or 3.29 percent, to close at 2,335.83.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, jumped near 45.

All S&P sectors were lower, led by financials and energy.

Stocks closed out the worst quarter in almost three yearslast week amid fears over the global recovery. For the quarter, the Dow and the S&P plunged more than 12 percent, while the Nasdaq tanked over 14 percent.

However, October still might be too early for investors to breathe a sigh of relief, as strategists say volatility will likely continue.

“Until we get some resolution out of Europe, the market’s going to keep bouncing back and forth,” Alan Valdes, director of floor operations and VP of trading at DME Securities. “I don’t see any change in volatility either.”

• Guide for Nervous Investors: What to Track in October

European shares finished lowerafter news Greece is likely to miss deficit targetsfor both this year and 2012 despite harsh new austerity measures and could be forced to seek more bailout funds, according to draft budget figures.

Deputy Finance Minister Pantelis Oikonomou said that Greece persuaded experts in the "Troika"—made of the IMF, EU and ECB—that the slippage was chiefly because of a deeper-than-expected recession.

Adding to woes, the contraction in manufacturing in the euro zone quickened in September, with new orders shrinking at their fastest pace since June 2009, according to a survey.

• Where to Invest Now: Strategy for Volatile Markets

Gold prices rallied for a third session to trade above $1,650 an ounce as investors rushed into the precious metal as a safe-haven play.

Among financials, Goldman Sachs wrote in a note to clients that risks are rising that the US may fall into a shallow, yet prolonged and painful recession that could lift the country's unemployment to 12 percent.

Finally, Citigroupis being probed by Japan's markets regulator the Financial Services Agency for various failings, a source told Reuters. In addition, Credit Suisse cut its price target on the bank to $50 from $57.

Also, Credit Suisse lowered its price target on Morgan Stanley to $28 from $29.

AMR shares plunged more than 30 percent to hit their lowest levels since Apr. 2009 as analysts debated the prospects for a bankruptcy filing. The shares were halted seven times. Meanwhile, AMR denied it is considering a pre-packaged bankruptcy.

Meanwhile, United Continental and U.S. Airways also slumped after Citi downgraded the two airlines to "hold" from "buy" and to "sell" from "hold," respectively.

Among materials, Alcoa fell to hit a new 52-week low after Deutsche Bank cut its rating on the aluminum procuder to "hold" from "buy" and Freeport McMoran to "buy" from "hold."

Semiconductors were down sharply, dragged by Micron Tech , AMD and Nvidia .

General Motors and Ford posted September sales that gained 20 and 9 percent respectively, while Toyota sales plunged 17.5 percent. But all three stocks were lower along with the boarder market.

Bucking the weak market trend, Eastman Kodak skyrocketed after the photography company denied it has a bankruptcy plan. This comes after the firm lost almost half their value in the previous week following news it borrowed $160 million against its credit line in addition to hiring a law firm specializing in restructuring.

And Yahoo rallied to lead the S&P 500 gainers after news the search-engine firm forged a deal with ABC to use the media company's news on its website. Separately, the CEO of Chinese Internet company Alibaba earlier said he would be "very interested" in buying Yahoo.

Pharmaceutical Product Development jumped after the firm agreed to be acquired by Carlyle Group, Hellman & Friedman for $3.9 billion.

On the economic front, U.S. manufacturing expanded at a slightly faster pace than expected in September, the latest hint of resilience in factory activity despite faltering economic growth.

And construction spending posted an unexpected gain in August from a drop in July, according to the Commerce Department.

—Follow JeeYeon Park on Twitter: twitter.com/JeeYeonParkCNBC—

Coming Up This Week:

TUESDAY: Factory orders, Bernanke speaks, Apple iPhone event; Earnings from Yum Brands
WEDNESDAY: Weekly mortgage apps, Challenger job-cut report, ADP employment report, IS non-mfg index, oil inventories; Earnings from Costco, Monsanto, Marriott
THURSDAY: BoE announcement, ECB announcement, jobless claims, chain-store sales; Earnings from Constellation Brands
FRIDAY: Non-farm payroll, wholesale trade, consumer credit, Sprint's 4G plans unveiled

More From CNBC.com:

• The Trendiest Halloween Costumes for 2011
• 10 Cars that Failed
• The Best Places to Work on Wall Street