The Dow dropped more than 200 points on Tuesday, handing Wall Street its worst day in three months on renewed fears of a disorderly default in Greece and concerns that China's slowdown would hit global growth.
Analysts have expected a pullback for weeks, citing an overstretched market. Despite the day's decline, the S&P 500 is still up almost 7% for the year. If fourth-quarter gains are included, the benchmark index is still up almost 20% since September 30.
Wall Street's anxiety gauge, the CBOE Volatility Index or VIX, jumped about 16% to near 21, rising above its 50-day moving average for the first time since November. About 10 stocks fell for every one that rose the New York Stock Exchange, with bank and miner shares among the top decliners.
Equities' recent rally has continued without a substantial pullback since December, supported in part by expectations that Europe's credit crisis would be contained and China's economy could avoid a hard landing.
"It might be just time we have a bit of a pullback here as this market begins to reassess what the future growth prospects for the year look like," said Burt White, managing director and chief investment officer at LPL Financial in Boston.
The Dow Jones industrial average slid 203.66 points, or 1.57%, to close at 12,759.15. The Standard & Poor's 500 Index dropped 20.97 points, or 1.54%, to 1,343.36. The Nasdaq Composite Index fell 40.16 points, or 1.36%, to end at 2,910.32.
It was the Dow's first drop of more than 200 points since November 23. The last time the S&P 500 fell more than 1% was in late December.
Apple shares fell, but outperformed the broader market after volatile swings in recent days. The stock closed down 0.5% at $530.26 on Tuesday.
Europe's downturn appeared ready to turn into a full-fledged recession due to a collapse in household spending, exports and manufacturing in the final months of 2011, the European Union said.
Brazil's gross domestic product expanded by a meager 2.7% in 2011, data showed Tuesday, adding to concerns after China cut its growth outlook earlier in the week. Expected growth in emerging markets has been a main catalyst for equities' gains.
A group representing Greek bondholders warned a default could cause more than 1 trillion euros of damage to the region. Creditors have until Thursday night to accept a bond swap in which they would lose almost three-quarters of the value of their bonds.
As part of a reassessment of possible collateral damage if the Greek deal with private debt holders collapses, traders sold the stocks of large banks on concern about their exposure to Greece.
The S&P financial sector index dropped 2.5% and the KBW bank index fell 2.7%. Morgan Stanley lost 5.3% to $17.32.
Greece has no plans to extend the deadline on its bond-swap offer to private creditors, officials said, dismissing market rumors that the date may be changed to increase participation in the offer.
Basic materials stocks also tumbled as commodity prices fell, pressured further by a stronger US dollar.
Aluminum producer Alcoa Inc <AA.N> lost 4.1% to $9.47 and Freeport-McMoRan Copper & Gold fell 2.5% to $39.44.
Utilities, a traditional defensive play, were the best-performing S&P sector during Tuesday's slide. An S&P utility sector index ended the day down 0.5%.
Volume was slightly heavy with about 7.6 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, above the daily average of 6.9 billion.
