 "Wall St declines, investors focus on Fed policy meeting")
Losses were led by the energy and financial sectors, with both the S&P energy index and S&P financial index down 0.8%. Shares of Southwestern Energy slid 3% to $38.14 and shares of Noble Energy fell 2.1% to $62.07 following as a decline in natural gas prices.
Several merger announcements helped to limit losses, along with news of a $1 billion stock repurchase program by Caterpillar that pushed its stock up 1.1% to $83.03, making it the biggest support for the Dow.
But the Fed's statement, which is due on Wednesday after a two-day meeting of the Fed's Open Market Committee, kept investors wary of buying. The statement will be scrutinized for hints on when the central bank may begin to scale back its massive bond-buying aimed at stimulating the economy.
Data this week includes July's payrolls report, another key event for the market.
"A lot depends on how (Fed policymakers) interpret the data and how they comment ahead of the employment report. We're looking for clues as to whether tapering is going to begin in September or not," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
The Dow Jones industrial average was down 36.86 points, or 0.24%, at 15,521.97. The Standard & Poor's 500 Index was down 6.32 points, or 0.37%, at 1,685.33. The Nasdaq Composite Index was down 14.02 points, or 0.39%, at 3,599.14.
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September is the most likely time for the Fed to begin paring its $85 billion in monthly bond purchases, according to a July 22 Reuters poll of economists.
Some investors have worried that big gains in jobs numbers could be enough of an economic pickup to prompt an early end to the Fed's bond buying, a program which has helped stocks rally for much of this year.
But analysts have noted that signs of a stronger economy are more important for the market in the long run. The S&P 500 is up 18.2% for the year so far.
Monday's data was less than upbeat. Contracts to purchase previously owned US homes fell in June, retreating from a more than six-year high touched in May as rising mortgage rates were starting to dampen home sales.
Merger activity could give equities support as big deals show that large investors see value in the market.
"It's interesting to me that you've got deal activity this time of the year because normally this is the time of the year when the markets are quite quiet," said Dan Veru, chief investment officer of Palisade Capital Management in Fort Lee, New Jersey, which manages about $4.5 billion in assets.
"To have mergers going on now probably bodes well that the fall is going to be a very active period."
US drugmaker Perrigo agreed to buy Irish drug company Elan for $8.6 billion. US-traded Elan shares rose 3.5% to $15.46. Perrigo was the S&P 500's worst%age decliner, shedding 6.7% to $125.17.
Hudson's Bay Co , operator of department store chains Lord & Taylor in the United States and The Bay in Canada, said it would buy luxury retailer Saks Inc for $16 per share. Saks shares rose 4.2% to $15.95.
Shares in advertising groups jumped after Publicis and Omnicom said they would merge. Investors bet the deal would create an opening for rivals to poach defecting clients and potentially trigger more deals.
Omnicom shares were down 0.6% to $64.75 while smaller rival Interpublic Group gained 4.7% to $16.61.
Among the day's big gainers, shares of CF Industries Holdings Inc , the world's second-largest maker of nitrogen fertilizer, jumped 11.8% to $202.30 after activist hedge fund Third Point LLC said it had acquired a stake.
In earnings news, Loews Corp , the hotel, energy and financial services conglomerate, posted a jump in second-quarter profit as revenue from its insurance arm, CNA Financial , increased nearly 13%. Shares of Loews ended up 0.02% at $46.06.
After the closing bell, shares of PMC-Sierra were down 8.7% at $6.40 following the release of its results.
With results in from more than half of the S&P 500 companies, 67.2% are beating analysts' earnings expectations - in line with the 67% average beat over the last four quarters. About 56% of the companies are beating revenue expectations, more than the 48% of revenue beats in the past four earnings seasons, Thomson Reuters data showed.
Volume was roughly 5.2 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, well below the average daily closing volume of about 6.4 billion this year.
Decliners outpaced advancers on the NYSE by about 2.3 to 1 and on the Nasdaq by a ratio of more than 2 to 1.