"Bernanke faces his second day on the Hill today testifying about the Fed's recent decision to bail out Bear Stearns and who may be the next to fall; traders and investors still are skeptical that the worst is over," said Kevin Giddis, managing director in charge of fixed-income trading at Morgan Keegan & Co. Inc.
The Dow Jones Industrial Average fell 50.07 points to 12,555.76, with 22 of its 30 components trading lower.
The S&P 500 declined 5.59 points to 1,361.94, while the technology-laden Nasdaq Composite dropped 14.05 points to 2,347.35.
Ahead of the open, the Labor Department reported first-time applications for state unemployment benefits climbed last week, hitting levels last seen in mid-September 2005. .
Stock indexes pared losses after the Institute for Supply Management's March reading of the services sector proved better than forecast, with its non-manufacturing index rising to 49.6% in March, above the 48.5% reading analysts had expected.
Volume on the New York Stock Exchange neared 695 million, and declining stocks ran ahead of those advancing 4 to 3. On the Nasdaq, 385 million shares exchanged hands, and decliners edged past advancers 3 to 2.
The airline sector came under fire after privately-held ATA Airlines closed operations and filed for bankruptcy, with the Amex Airline Index falling 0.8% early on. .
A downgrade of technology bellwether Cisco Systems Inc. also weighed on investor sentiment, with UBS expressing concern over the networking giant's orders growth in switching its recommendation to neutral from buy.
Shares of Cisco fell 3.5% in early trading.
Shares of eBay Inc. edged higher after the online auctioneer drew an upgrade to buy from neutral from Merrill Lynch.
On the New York Mercantile Exchange, crude and gold futures fell, with the oil contract sliding 52 cents to $104.31 a barrel and the metal contract down $3.60 at $891.60 an ounce.
By Kate Gibson