"Despite the bad news, the stock market is holding together, or at least, it's not in a downward-spiral sinking spell," said Hugh Johnson, chairman of Johnson Illington Advisors.
"The truth is, the credit markets are operating better than you might expect, given all the talk."
Down more than 100 points at one point in the session, the Dow Jones Industrial Average finished down 71.9 points, or 0.5%, at 13,912.9, with 22 of its 30 components ending in the red.
The S&P 500 fell 10.18 points, or 0.7%, to end at 1,538.53, while the Nasdaq Composite gave up 16.1 points, or 0.6%, to end at 2,763.9.
Spiking crude-oil prices and their potential damage to consumer spending and economic growth added to the bearish tone. .
"Both the economy and earnings growth are decelerating," said Hal Goldstein, co-manager, First American Mid Cap Growth Fund. .
Bear Stearns Cos. Inc. proved one of the few gainers in the financial sector, its stock rising 3.4% after China's Citic Bank Corp. confirmed an interest in acquiring a stake in the Wall Street firm. .
Several large regional banks, however, reported earnings illustrating the strain of the credit trouble, cautioning the turmoil in the U.S. housing and mortgage markets would chip away at fourth-quarter profits. .
Technology stocks were also among Wall Street's laggards, with bellwethers including Oracle Corp. , Dell Inc. and Cisco Systems Inc. all on the decline.
IBM Corp. proved an exception, with Big Blue shares climbing 0.3% ahead of the company's third-quarter financial results.
Other technology companies due to report after the close include Yahoo Inc. and Dow component Intel Corp. .
On the New York Stock Exchange, 1.3 billion shares were traded, and declining stocks topped those advancing by more than 2 to 1. On the Nasdaq, more than 2 billion shares changed hands, as declining issues outpaced those advancing 9 to 5.
"There have been times in the recent past where we had a similar backdrop and yet the market forged on higher. It has created a weakened technical condition which makes the market vulnerable to a further decline," said Elliot Spar, option/market strategist, Stifel Nicolaus & Co.
On Monday, stocks posted their biggest drop in more than a month. Oil prices probed uncharted territory and Citigroup warned the credit crunch could dent fourth-quarter results after driving earnings of the nation's largest bank down 57% for the third quarter.
Citigroup's shares, part of the Dow industrials, surrendered another 3.1% in Tuesday's action.
In an echo of Federal Reserve Chairman Ben Bernanke's statement that trouble in the housing market would likely slow economic growth into early 2008, Treasury Secretary Henry Paulson said Tuesday that trouble in the housing sector posed the greatest threat to the economy.
"Further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year," Bernanke said in a speech Monday night to the New York Economic Club. .
"For the last two days we've had to contend with some bad news, which all comes under the headline of two things: housing and credit problems are still with us, and not going away soon, and oil prices are higher," said Johnson.
But Johnson points to the short-term, asset-backed commercial paper market, saying yields that climbed as high as 6.18% at the end of August are now back down to 5.10%, "as confidence has returned to the short-term commercial paper markets."
Tuesday's economic agenda included a September reading on industrial production, with the Federal Reserve's report showng an expected slowdown from prior months. .
In a separate report, the Treasury Department said capital flows to the United States fell dramatically in August, reflecting the financial turmoil that marked the month. .
Ericsson AB , the world's largest maker of wireless networks, reported lower demand in North America and Europe, and warned on profit. Shares shed a quarter of their market value in European action. The Swedish company's warning furthered concerns about business spending, and Ericsson's U.S.-listed shares plunged on the news. .
Dow component Johnson & Johnson saw its shares dip nearly 0.9%. The world's biggest health-care products company reported a lower third-quarter profit, but revenue came in above Wall Street expectations.
Shares of Genentech Inc. were off 3.2% after the biotechnology giant reported late Monday third-quarter results that just topped analysts' estimates.
Home builder D.R. Horton Inc. said net sales orders for the fourth quarter declined 39% from a year earlier. Its shares fell 5.3%.
Gold futures climbed slightly, finishing at $762.0 an ounce, up 20 cents, on the New York Mercantile Exchange. .
Treasury prices gained, with the benchmark 10-year note up 6/32 to 100 23/32, its yield falling to 4.657%. .
The dollar rose slightly against major currency rivals, with the dollar index, which measures the U.S. currency against a basket of counterparts, was up 0.2%. .
By Kate Gibson