"Buyers haven't put on their Santa Claus hats just yet. Historically there is a positive bias for the market during the last week of the year. However, 2008 is anything but normal," said Michael Sheldon, chief market strategist at RDM Financial Group.
After falling in the last four sessions, the Dow Jones Industrial Average turned tail on earlier gains to extend its losing streak. The blue-chip index finished at 8,419.49, off 100.28 points, or 1.2%.
Just five of the blue-chip index's 30 components finished in the black, led by Alcoa Inc. , up 3.7% for the session.
Shares of General Motors Corp. and Ford Motor Co. were each down about 15% after both automakers drew downgrades from two major ratings agencies after Monday's close. Standard & Poor's said the risk of bankruptcy remains high, regardless of government loans. .
"The end-of-year rally, Santa Claus rally -- or whatever you want to label it as -- was cut short last week. A lot of that had to with the fact we're still seeing turmoil in the auto sector," said Peter Cardillo, chief market economist at Avalon Partners. .
On Capitol Hill, Vice President-elect Joseph Biden said Barack Obama's transition team is still negotiating the details of its economic-stimulus plan with Congress, with a deal not yet complete. .
"If the stimulus plan is as big and bold and timely as we hope it will be, it could change the playing field for equity markets and the outlook for the economy as we go through the next year," according to Sheldon.
The S&P 500 Index shed 8.48 points, or 1%, to stand at 863.15.
Consumer discretionary, utilities and information technology fronted the sector losses among the S&P's 10 industry groups, with telecommunication services and health care hit the least.
Bucking the negative trend among financial shares, ProLogis gained 10.3% after the real-estate investment trust said it's selling its operations in China and property-fund interests in Japan to GIC Real Estate for $1.3 billion, plus assumed liabilities. .
Shares of CIT Group Inc. gained 1.9% after the commercial-finance company said it entered into definitive agreements with the U.S. Treasury Department to tap $2.33 billion in Troubled Assets Relief Program funds.
The Nasdaq Composite Index lapsed 10.81 points, or 0.7%, to 1,521.54. .
Trading volume was thin, as expected for the holiday-shortened week. On the New York Stock Exchange, almost 985 million shares traded, with decliners passing advancers 3 to 2. On the Nasdaq, nearly 500 million shares traded and decliners topped advancers 9 to 5.
Crude futures fell, furthering a 6% slump in the previous session, as gloomy economic news fueled worries of weaker energy demand. The contract for February delivery fell 93 cents to close at $38.98 a barrel on the New York Mercantile Exchange. .
Gold futures also fell, with the spot month closing down $9.1 to finish at $838.10 an ounce. .
"U.S. consumers trimmed their spending instead of their trees in the week before Christmas, while GM stock and bond investors are apparently better that the company will not make it despite its recent injection of loan money," Jon Nadler, senior analyst, Kitco Bullion Dealers Montreal, wrote in an afternoon note.
The U.S. dollar gained, with the dollar index at 81.31 from 81.227 in late North American trading Monday. .
Short-term Treasury prices rose modestly after reports showing sales of new and existing homes slowed in November, with the 2-year note yields off 2 basis points, or 0.02%, to 0.89%. .
U.S. real GDP for the third quarter fell at a 0.5% annualized rate,unrevised from the prior estimate, the Commerce Department said. The contraction was in line with economists' expectations.
The indexes had added to earlier gains after two separate reports on the troubled housing market. But they later turned lower.
The Commerce Department estimated the sale of new homes fell to more than 17-year lows in November. .
A separate report had the sales of existing homes falling 8.6% last month, with home prices falling at their most rapid annual pace on record.
Consumer sentiment improved in December, rebounding from multidecade lows, according to a survey released by Reuters and the University of Michigan.
Shares of Textron Inc. lapsed 20.5% after the company lowered its adjusted fourth-quarter earnings outlook late Monday and said it would trim about 5% of its global workforce.
Discussions between Walt Disney Co. and Hong Kong officials are under way over the possible expansion of Hong Kong Disneyland, which may include adding attractions that would be unique to the Hong Kong venue, The Wall Street Journal reported.
Also in the headlines, General Dynamics Corp. said late Monday its Electric Boat unit and Northrop Grumman Shipbuilding, a unit of Northrop Grumman Corp. , received a $14 billion contract from the U.S. Navy to build eight Virginia-class submarines.
Unisys Corp. , trading as a penny stock, advanced 45.3% after its announcement late Monday that it would act to reduce costs, including laying off about 1,300 workers.
Asian markets dropped sharply Tuesday in thin trading as investors rushed to take profits ahead of the holidays. European markets advanced.
By Kate Gibson