Energy and bank stocks led the decline on the S&P 500. U.S. crude futures dropped near last week's eight-month low, and news that Spain had requested help for its struggling banks pressured financial stocks. The S&P 500 energy sector index was off 2.6 per cent and the financial sector index lost 2.2 per cent.
"Declining oil prices and near-record low bond yields indicate slowing global growth, while elevated sovereign credit spreads and a strong U.S. dollar suggest the European crisis is nowhere near being resolved," said Mandy Xu, equity derivatives strategist at Credit Suisse in New York.
Markets continue to react to European headlines as the spiraling debt crisis in Europe could further hurt a slowing global economy. Austerity measures pushed forward by Germany have Greece mired in a long recession. Investors worry Spain could follow Greece's path as Madrid's borrowing costs remain stubbornly high.
Expectations for the two-day summit, which starts on Thursday, are low after Germany resisted pressure for common euro zone bonds or a flexible use of Europe's rescue funds at a meeting of the region's four biggest economies last week.
Among individual stocks, Chesapeake fell 8.3 per cent to $17.06. Reuters reported that under the direction of Chief Executive Aubrey McClendon, the company plotted with its top competitor to suppress land prices in one of America's most promising oil and gas locations.
The Dow Jones industrial average was down 146.94 points, or 1.16 per cent, at 12,493.84. The Standard & Poor's 500 Index was down 21.66 points, or 1.62 per cent, at 1,313.36. The Nasdaq Composite Index was down 53.48 points, or 1.85 per cent, at 2,838.94.
For the month, the Dow was up 0.6 per cent while the S&P 500 was flat. The Nasdaq was up 0.2 per cent.
"There are technical reasons to support a July bounce, namely near-term signs of bearish exhaustion and the index's (S&P 500) attempt to establish a base above the 200-day moving average support," said Ari Wald, a technical strategist at Brown Brothers Harriman in New York.
"However, barring any explosive breakouts with surging volume, we believe this bounce should be counter to the index's secondary downtrend."
Spain formally requested euro zone rescue loans for up to 100 billion euros ($125 billion) to recapitalize its banks, saying the final amount of assistance would be set at a later stage. Some market economists say it is merely a prelude to a full bailout for Spain.
Spanish government bonds came under pressure with the 10-year bond yield 18 basis points higher at 6.53 per cent, near the 7-per cent mark that forced other indebted European countries to ask for bailouts.
The U.S. Supreme Court said on Monday it will rule on the constitutionality of a 2010 healthcare reform law on Thursday, the last day of the high court term. The Morgan Stanley healthcare payor index dropped 1.9 per cent.
A European equity benchmark fell 1.6 per cent and the dollar, seen as a safe-haven when European markets are volatile, rose as worries about global growth lingered after last week's soft data on manufacturing worldwide.
New U.S. single-family home sales surged in May to a seasonally adjusted 369,000-unit annual rate, the highest since April 2010, and prices rose from a year ago amid tightening supply. But the European concerns apparently overshadowed any positive impact as a homebuilding index fell 1 per cent.
Wal-Mart Stores Inc was the only gainer on the Dow. Walmart Canada said the company is opening of 47 hiring centers across Canada to support its growth plans. The stock rose 0.5 per cent to $67.65.
Copyright @Thomson Reuters 2012