But a late-day rally helped stocks erase some of their losses with most of the pullback concentrated in the technology- heavy Nasdaq. The move suggested investors were still willing to buy on dips even after the sharp losses in the last session.
In Europe, business activity indexes dealt a blow to hopes that the euro zone might emerge from recession soon, showing the downturn across the region's businesses unexpectedly grew worse this month.
"The PMI numbers out of Europe were really a blow to the market," said Jack De Gan, chief investment officer at Harbor Advisory in Portsmouth, New Hampshire. "The market was expecting signs that recovery is still there, but the numbers just highlighted that the euro-zone problem is still persistent," he added.
US initial claims for unemployment benefits rose more than expected last week while the Federal Reserve Bank of Philadelphia said its index of business conditions in the US mid-Atlantic region fell in February to the lowest in eight months.
Gains in Wal-Mart Stores Inc shares helped cushion the Dow.
The shares gained 1.5 per cent to $70.26 after the world's largest retailer reported earnings that beat expectations, though early February sales were sluggish.
The Dow Jones industrial average fell 46.92 points, or 0.34 per cent, to 13,880.62 at the close.
The Standard & Poor's 500 Index lost 9.53 points, or 0.63 per cent, to 1,502.42.
The Nasdaq Composite Index dropped 32.92 points, or 1.04 per cent, to close at 3,131.49.
The two-day decline marked the US stock market's first sustained pullback this year. The Standard & Poor's 500 has fallen 1.8 per cent over the period and just managed to hold the 1,500 level on Thursday. Still, the index is up 5.3 per cent so far this year.
The abrupt reversal in markets, which started on Wednesday after minutes from the Federal Reserve's January meeting suggested stimulus measures may end earlier than thought, looks set to halt a seven-week winning streak for stocks that had lifted the Dow and the S&P 500 close to all-time highs.
Wall Street will soon face another test with the upcoming debate in Washington over the automatic across-the-board spending cuts put in place as part of a larger congressional budget fight. Those cuts, set to kick in on March 1 unless lawmakers agree on an alternative, could depress the economy.
Semiconductor stocks ranked among the weakest of the day, pressuring the Nasdaq as the Philadelphia Semiconductor Index fell 1.8 per cent. Intel Corp fell 2.3 per cent to $20.25 while Advanced Micro Devices lost 3.7 per cent to $2.60 as the S&P 500's biggest percentage decliner.
The Dow also got a helping hand from personal computer maker Hewlett-Packard Co, which rose 2.3 per cent to end the regular session at $17.10. The company was scheduled due to report first-quarter results after the closing bell.
Shares of Boeing Co rose 1.6 per cent to $76.01 as a senior executive was set to meet with the head of the US federal aviation administration on Friday and present a series of measures to prevent battery failures that grounded its 787 Dreamliner fleet, according to a source familiar with the plans.
In other company news, shares of supermarket operator Safeway Inc jumped 14.1 per cent to $22.97 after the company reported earnings that beat expectations.
Shares of VeriFone Systems Inc tumbled nearly 43 per cent to $18.24 after the credit-card swipe machine maker forecast first- and second-quarter profits well below expectations.
Of the 427 companies in the S&P 500 that have reported results so far, 69.3 per cent have exceeded analysts' expectations, compared with a 62 percent average since 1994 and 65 per cent over the past four quarters, according to Thomson Reuters data through Thursday morning.
Fourth-quarter earnings for S&P 500 companies are estimated to have risen 5.9 per cent, according to the data, above a 1.9 per cent forecast at the start of the earnings season.
Berry Petroleum Co jumped 19.3 per cent to $46.02 after oil and gas producer Linn Energy LLC said it would buy the company in an all-stock deal valued at $4.3 billion, including debt. Linn Energy shares advanced 2.8 per cent to $37.68.
About two stocks fell for everyone that rose on the New York Stock Exchange and Nasdaq. About 7.64 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, well above the 20-day moving average of around 6.6 billion shares.
Copyright @ Thomson Reuters 2013