"There is a tremendous amount of uncertainty out there, and that uncertainty is breeding volatility. There is weak demand for energy and commodities across the board, and everybody is trying to get out at the same time, and that is hurting equities," said Anthony Conroy, managing director and head trader for BNY ConvergEx Group.
The Dow Jones Industrial Average declined 58.37 points to 11,458.55, with 18 of its 30 components posting losses, which were more recently led by Intel Corp. down 4.2%.
Home Depot Inc. fronted gains on the blue-chip index, up 3.1%.
"The market is going down because of the perception that the commodities markets are falling apart, which is being perceived as due to weaker economic activity on a global scale, putting pressure on the equities markets," said Peter Cardillo, chief market economist at Avalon Partners.
The S&P 500 Index fell 8.64 points to 1,268.93, while the Nasdaq Composite Index shed 19.46 points to 2,329.78.
Energy and information technology led sector losses on the S&P, while financials and telecommunication services led sector gains among the S&P's 10 industry groups.
Volume on the New York Stock Exchange neared 565 million, with decliners passing advancers roughly 4 to 3. On the Nasdaq, 437 million shares were exchanged, and decliners edging just ahead of advancers.
The major indexes had wavered between positive and negative territory after the Commerce Department reported factory orders rose by 1.3% in July, better than the 0.8% forecast by economists.
"One bright spot is factory orders were better than expected, and capital spending was way up for a second month in a row, showing that while the consumer has pulled back, businesses have not, at least over the last several months," said Cardillo.
Lehman holds a 20% stake in Ospraie Management LP, which said on Tuesday it's closing its flagship commodity hedge fund. At last check, shares of Lehman were up 15 cents at $16.28.
"Another negative is the fund closure. Once you have liquidating in certain commodities, it spreads, so what we have here is a market faced with traditional weakness in the month of September, and complicating that weakness is the decline of commodity prices, which is being perceived as weakness in the global economy," said Cardillo.
Shares of Fannie Mae gained 3.5% after the mortgage finance company auctioned off three and six-month notes on more favorable terms than its last offering.
The session will also bring August sales numbers from auto makers, with the sector expected to report anemic results in the wake of the economic slowdown and elevated fuel prices.
Oil prices declined amid ongoing dollar strength, with light sweet crude for October delivery down $1.26 at $108.45 a barrel in early action on the New York Mercantile Exchange. .
Shares of Corning Inc. fell sharply after the maker of glass used in flat-panel TVs cut its third-quarter sales and profit forecast. .
Coca-Cola Co. shares edged lower in the wake of the company's announcement that it was offering as much as $2.4 billion to buy China Huiyuan Juice Group Ltd. .
Shares of Kraft Foods Inc. fell 0.9% after the world's second-largest packaged food maker lowered its full-year profit forecast. .
Overseas, European shares fell, with the pan-European Dow Jones Stoxx 600 index off 1.2%. .
Asian stocks ended mixed, with the Nikkei 225 Average up 0.6% and the Hang Seng Index off 2.2%. .
By Kate Gibson