Investors were also disappointed that talks for a sign that the market is still not ready to support big mergers.
Financial shares sold off after a prominent analyst predicted more losses at banks and said the government's efforts to prop up the ailing industry might not be as effective as hoped.
Michael Mayo issued "sell" ratings on several banks and said in his report that loan losses could exceed levels seen in the Great Depression.
The market was already on edge about the coming parade of first-quarter results, which kicks off Tuesday with aluminum producer and Dow component Alcoa Inc. Worse-than-expected reports could easily upset the market's recent advance, which brought stocks up more than 20 percent from early March, when stocks hit their lowest levels in 12 years.
"You have some skittishness in the market," said Len Blum, managing director at Westwood Capital LLC. "We have earnings season up ahead and it's very difficult to predict what that is going to do."
According to preliminary calculations, the Dow Jones industrials fell 41.74, or 0.5 percent, to 7,975.85 after being down as much as 155 points.
The Standard & Poor's 500 index fell 7.02, or 0.8 percent, to 835.48, while the Nasdaq composite index fell 15.16, or 1 percent, to 1,606.71.
Technology stocks were lower following the IBM-Sun news. Discussions between the technology giants had been in their final stages, but The Associated Press learned that IBM took its offer off the table Sunday after Sun terminated IBM's status as its exclusive negotiating partner.
It was unclear whether talks were continuing, or if Sun was trying to find an alternative suitor. Sun shares plunged more than 22 percent, falling $1.93 to $6.56. IBM fell 66 cents, or less than 1 percent, to $101.65.
Also weighing on the technology sector was a downgrade of Cisco Systems Inc. A Goldman Sachs analyst cut the rating on the stock to "Neutral" from "Buy," saying it had reached her $18 price target. Shares dropped 63 cents, or 3.5 percent, to $17.53.
Among the biggest decliners in the financial industry were Wells Fargo & Co., which dropped $1.09, or 6.7 percent, to $15.25, and PNC Financial Services Group Inc., which fell $1.99, or 5.6 percent, to $33.81. Regional bank stocks also posted big losses.