The Federal Open Market Committee at 2 p.m. Eastern releases the minutes of its Aug. 7 policy-setting meeting, which could shed light on the central bank's thinking ahead of its next meeting on Sept. 18.
"We'd like to be reassured they are at the ready to move the Fed funds rate," said Art Hogan, chief market strategist at Jefferies & Co. "It's a dangerous game we're playing, especially if the Fed doesn't follow our script," said Hogan of market assumptions the Fed would trim the rate at least 25 basis points.
The Dow Industrial Average fell 139.1 points, or 1%, at 13,182.9, with 28 of its 30 components trading in the red, with Acola Inc. and American Express Co. leading the Dow's declines, with Acola off 3% and AmEx down 2.1%.
The Dow's minority advancing stocks involve two large retailers, with Home Depot , up 0.9%, and Wal-Mart Stores Inc.. ahead 0.4%.
The S&P 500 was down 16.56 points, or 1.1%, at 1,450.31, while the Nasdaq Composite shed 31.34 points, or 1.2%, at 2,529.91.
Volume at the New York Stock Exchange came to 659 million shares, with declining stocks outpacing advancers 5 to 1. At the Nasdaq, more than 832 million shares were exchanged, and decliners edged out advancing stocks about 3 to 1.
"This downside move may be exacerbated by the lack of volume but that is no reassurance if you are long and wrong," Elliot Spar, an option/market strategist at Stifel Nicolaus & Co., wrote in a midday comment.
Consumers not so confident
The Conference Board's reading for August fell to 105.0 in August from a revised 111.9 in July, with the current month's reading above forecasts of 104.0.
The decline in consumer sentiment was to be expected "after the turmoil in the equities markets that we've had," said Peter Cardillo, chief market economist at Avalon Partners.
Other economic data had Standard & Poor's reporting U.S. home sales fell at a faster pace in the second quarter, down 3.2% compared with the year-ago period, and marking the largest year-over-year decline in the 20-year history of the Case-Shiller home price index.
In further negative news for the financial sector, Merrill Lynch cut the ratings on Lehman Brothers , Bear Stearns and Citigroup , all downgraded to neutral from buy, due to concerns over their debt-market exposure.
Citigroup fell 2.5%, Bear Sterns was off 2.1% and Lehman Brothers declined 4.5%.
Earlier, banking stock declines led losses in European trading after the Times of London reported State Street Corp. has exposure to $22 billion of asset-backed commercial paper.
Also drawing investors' attention, shares of PolyMedica Corp. rose 14.3% after Medco Health Solutions Inc. agreed to buy the diabetes-care provider for $1.2 billion.
Coronthian Colleges Inc. rose 0.8% after the for-profit higher education company reported a lower fourth-quarter profit.
Set to release financial results after the close, Borders Group Inc. was expected to report a second-quarter loss as record-setting sales of the latest Harry Potter books haven't offset stiff competition from rivals including Wal-Mart Stores Inc. and Amazon.com . Borders was down 3.4%.
Crude-oil futures slid below the $72 mark as energy traders worried about refinery troubles on the U.S. gulf Coast, with the contract for October delivery off 41 cents a barrel at $71.56.
U.S. Treasurys were higher after the release of data showing a sharp decline in consumer confidence in August. The benchmark 10-year note, a reference for mortgage and corporate borrowing, was up 10/32 at 101 23/32 with a yield of 4.53%.
The dollar fell against som of its major rivals after the consumer confidence index fell from 111.9 in July to 105.0, its lowest level since last August. The dollar fell 0.6% against the Japanese currency to 114.95 yen. The euro was up 0.07% at $1.3646.
On the New York Mercantile Exchange, gold prices accelerated their decline, with the contract for December delivery falling $4.10, or 0.6%, to $672.10 an ounce.
Overseas, the Nikkei 225 average closed 0.1% lower in Tokyo and the FTSE 100, after a three-day break, slipped 0.8% in London.
U.S. stocks finished lower Monday after data on the number of unsold homes for July hit a peak not seen in more than 15 years.
By Kate Gibson