Stocks reversed early gains after the Institute of Supply Management said its March manufacturing index dropped to 50.9% in March from 52.3% in February and was below the 51.8% expected by Wall Street economists.
The Dow Jones Industrial Average was down 22 points at 12,332, after earlier rising to a high of 12,391. The Dow came under pressure from its financial components American Express Co. , Citigroup Inc. and JP Morgan Chase & Co. .
Rising shares on the Dow included Altria Group Inc. , which gained 2.7% as it started trading separately from Kraft Foods Inc. . Also, Merck Co. Inc. gained 1.6%.
Among other blue-chips, AT&T Inc. reversed early gains, losing 0.1%. AT&T and Mexican wireless operator America Movil were in talks to buy a stake in Telecom Italia . Telecom Italia shares were up 8%.
The telecom sector was hit after Nokia-Siemens, a venture between Nokia Corp. and Siemens AG , said there were signs of a slowing in equipment spending over the last few months, resulting in a downgrade of its 2007 industry-wide spending forecast.
The S&P 500 index fell 3 points to 1,417, while the Nasdaq Composite lost 7.2 points to 2,414.
Among technology shares, Apple Inc. gained 0.2% after it reached a deal with EMI to make music available without antipiracy software. Higher-quality tracks from EMI will be available at $1.29 instead of 99 cents for regular tracks on Apple's Itunes.
New quarter, same problems
Stocks had opened on an upbeat note after yet another huge private-equity deal.
Kohlberg Kravis Roberts agreed to buy First Data for $34 a share, a 26% premium to Friday's close. First Data said it will try for 50 days to find another bidder. First Data was up 21%.
The proposed leveraged buyout helped to reassure investors, at least temporarily, that financial liquidity has not yet dried out and can still fuel markets.
The market has been volatile since the end of February as a meltdown in the subprime mortgage market fueled concerns that lending will subside, further hurting the housing market and weakening an already slowing U.S. economy.
And Monday's weak manufacturing report did little to soothe those concerns.
Investors are also now concerned that some companies may start lowering their earnings outlooks this week to reflect a slowing economy, as the first-quarter earnings season looms.
U.S. stocks finished a volatile Friday on a mixed note, mirroring a likewise volatile and mixed performance in the first quarter, which has left the Dow industrials in negative territory for the year, while other indices held on to meager gains. .
Joining concerns about subprime and earnings on Monday, shares of M&T Bank Corp. fell 8% after the Buffalo, N.Y.-based bank warned that trouble in its subprime residential mortgage segment will cut first-quarter net income to $1.50 to $1.60 a share. Analysts polled by Thomson Financial expected the bank to earn $1.86 a share.
The news kept pressure on financial stocks, offsetting a boost from a Goldman Sachs upgrade of Merrill Lynch to buy from neutral. The broker said a sell-off in Merrill shares over subprime mortgage concerns has been overdone. Merrill reversed early gains to lose 0.2%.
The firm also downgraded Jefferies Group Inc. to neutral from buy. Jefferies fell 3%.
Adding to ongoing concerns about pressure on consumers and the economy, crude oil prices surged past $66 a barrel last week amid ongoing tensions between the UK and Iran, the world's fourth largest crude oil producer.
On Monday, however, crude oil futures ere down 39 cents to $65.44 a barrel, dipping as a French port strike ended.
Gold futures likewise slipped $6.80 to $656.20 an ounce.
The dollar held to a tight range ahead of the ISM index. Earlier, the Bank of Japan's quarterly tankan survey of business sentiment showed confidence among large manufacturers declined more than expected in March. Also, the euro-zone manufacturing PMI slipped to 55.4 in March from 55.6 in February.
Sam Zell won a bidding war to buy Tribune Co. in a multi-billion dollar deal.
Xerox agreed to buy Global Imaging Systems for $1.5 billion, or $29 a share. The news sent Global Imaging shares soaring 47% to $28.70 ahead of the open.
AirTran Holdings upped its hostile offer for Midwest Air Group to $389 million, or $15 a share.
Elsewhere, the chief executive of Starwood Hotels & Resorts Worldwide , Steven Heyer, resigned on Monday after a boardroom clash, though the hotels group insisted his departure isn't performance related and reiterated earnings guidance. Starwood said its chairman, Bruce Duncan, will become interim CEO.
By Nick Godt