On the last day of trading in October, stocks were under pressure from the start as worries grew that the long-awaited European Union deal addressing the eurozone debt crisis, whose delivery Thursday sparked huge market rallies, was short on details.
Market jitters were further heightened after embattled Greek Prime Minister George Papandreou called Monday for a confidence vote and a referendum on last week's EU debt deal, taking a political gamble to silence growing opposition to his policies.
"Skepticism as to whether the eurozone’s debt plan can deliver was palpable, with funding the leveraging of the eurozone’s bailout facility topping the list of concerns," Charles Schwab analysts said in a client note.
Patrick O'Hare at Briefing.com highlighted reports that Europe's plan to expand its eurozone rescue firepower "has not been an easy sell to China and Japan. That has raised concerns about implementation risk."
The Dow Jones Industrial Average skidded 276.10 points (2.26 per cent) to finish at 11,955.01.
The Nasdaq Composite tumbled 52.74 points (1.93 per cent) to 2,684.41, while the S&P 500 index, a broader measure of the markets, slid 31.78 points (2.47 per cent) to 1,253.30.
Financials were under attack amid the eurozone worries and after brokerage MF Global filed for bankruptcy protection following a string of losses from European public debt holdings.
Trading in MF shares had been suspended early Monday in anticipation of the bankruptcy filing.
But attention immediately turned to JPMorgan Chase and subsidiaries of Deutsche Bank, after MF's bankruptcy filing showed those firms to be its two biggest creditors.
JPMorgan was said to have a claim of over $1.2 billion with MF linked to bond holdings, while Deutsche Bank had a claim of over $1.0 billion.
Shares in JPMorgan dropped 5.3 per cent on the news while Deutsche Bank's US-listed shares plunged 11.5 per cent.
Bank of America fell 7.1 per cent, Citigroup dropped 7.5 per cent, Goldman Sachs slid 5.5 per cent and Morgan Stanley lost 8.7 per cent.
A raft of agenda items this week reinforced the cautious sentiment. The Federal Reserve is slated to wind up a two-day monetary policy meeting Wednesday with a news conference by Fed chairman Ben Bernanke.
The economic calendar is capped by Friday's highly anticipated October job market numbers.
Investors shrugged off the latest reading on manufacturing in the Midwest that showed a dip on the ISM Chicago purchasing managers index.
Wall Street's three big stock indexes had closed narrowly mixed Friday but gained more than three per cent over the week, buoyed by news of the eurozone debt deal.
The bond market rallied. The yield on the 10-year Treasury dropped to 2.18 per cent from 2.31 per cent Friday, while that on the 30-year Treasury fell to 3.20 per cent from 3.35 per cent.
Bond yields and prices move in opposite directions.