"We want to see how the credit markets settle," said Mike Malone, trading analyst at Cowen & Co. "A number of funds have taken significant leverage and investors are waiting to see how credit markets deal with this, even if we don't see another high-profile blowup."
Markets have been rocked since last week after problems from the distressed subprime mortgage market led to the near collapse of two hedge funds owned by Bear Stearns & Co. .
Adding to the market's nervousness Tuesday, the Securities and Exchange Commission said it has opened 12 investigations into "issues such as" collateralized loans.
The Dow Jones Industrial Average finished down 14 points at 13,337, off of an earlier high of 13,452. Of the Dow's 30 components, 17 fell. Merck & Co. , Johnson & Johnson , Pfizer Inc. and AT&T Inc. led the gains, while Alcoa Inc. , Dupont and United Technologies fell.
Also among blue chips, Altria Group Inc. rose 1.3%. The company said will take a charge of $325 million, or 10 cents a share, to shut down its 2,500-employee Philip Morris cigarette factory in Cabarrus, N.C., by 2010 in a move to cut costs.
The S&P 500 fell 2.9 points to 1,492, while the Nasdaq Composite dropped 2.9 points to 2,574.
Among key technology shares, Apple Inc. dropped 2.2%, after the company and AT&T Inc. unveiled prices for service plans to use Apple's iPhone. Elsewhere, Oracle fell 1.6% ahead of its earnings report after the close.
Trading volumes showed 1.7 billion shares trading on the New York Stock Exchange and 2.0 billion on the Nasdaq stock market. Declining shares topped gainers by 20 to 11 on the NYSE and by 16 to 13 on the Nasdaq.
Subprime, hedge fund jitters
On Monday, stocks closed a volatile session with mild losses amid continued nervousness about subprime lending and the near collapse of two hedge funds owned by Bear Stearns Cos. Inc. , with exposure to that sector. The Dow first rallied to gain over 120 points in the morning before falling back to close down 8 points.
On Tuesday, Bear Stearns stock remained volatile, although it finished up slightly, while the likes of Goldman Sachs and Lehman brothers fell.
"The strength in the share price [...] seems to suggest that some investors believe that the recent decline in Bear Stearns was an overreaction," said Frederic Ruffy, analyst at Optionetics. "If so, it could be sign that fears of wider credit problems were also overblown."
Treasury bonds, which had received safe-haven bids since last week, gave back some of their gains. The benchmark 10-year note finished down 5/32 at 95-12/32, lifting its yield to 5.101%.
By sector, pharmaceuticals , telecoms and utilities advanced, while gold shares , oil services and natural gas retreated.
A report showing new home sales fell 1.8% in May after surging in April, was still slightly better than expected.
But another housing report -- Standard & Poor's Case-Shiller home price index -- showed home prices fell at the fastest pace in 16 years in April.
In addition, homebuilder Lennar Corp. slumped 2.6% after posting a quarterly loss, citing continued deterioration in the housing market. The firm also forecast further weakness.
"There is no reason to think a proper recovery [in housing] will start anytime soon," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
A dearth of over-the-weekend deal news on Monday had fueled concerns that rising interest rates might slow the flow of leveraged deals. Such deals, which often rely on heavy borrowing, have fueled the private-equity byout bonanza and the stock market over the past few years.
Shares of Blackstone Group LP , the private equity group, slid 5.2%, falling below the $31 level where the company priced shares in its initial public offering last Friday. There are also concerns about proposed legislation that would lift taxes on private equity.
Meanwhile, some deal news came back to the fore on Tuesday.
BlackRock Inc. agreed to buy the fund-of-funds business of Quellos Group for up to $1.7 billion. BlackRock said the deal will make it one of the largest fund-of-funds providers, with over $25.4 billion under management.
The Dutch advocate general declared that ABN Amro's planned $21 billion sale of its LaSalle unit to Bank of America doesn't require a shareholder vote. The decision is viewed as advancing Barclays plc in its bid to acquire ABN Amro.
And News Corp. and Dow Jones & Co. Inc. reached a deal to allow editorial protections for Dow Jones. The deal might pave the way for News Corp.'s $5 billion offer for Dow Jones, the publisher of both The Wall Street Journal and of MarketWatch.
Stocks on the move
Shares of retailer Target Corp. fell 1.9%. The company said that June same-store sales growth will be at the low end of its planned 3% to 5% range.
On the earnings front, Kroger Co. fell 6.7% after the nation's largest supermarket operator turned in first-quarter earnings that jumped 10% but weren't good enough to please investors who had been expecting more.
There also are earnings reports scheduled for and Nike Inc. after the Tuesday close.
Commodities prices mostly fell.
Crude oil futures finished down $1.41 at $67.77 a barrel, giving back gains after the end of a strike in Nigeria over the weekend and ahead of weekly inventories data on Wednesday.
The August gold contract dropped $9.40 to close at a five-month low of $645.30 an ounce.
The yen overnight managed to strengthen against its major rivals after Japanese Finance Minister Omi said he is "watching foreign exchange rate moves very closely", which finally signals some sort of preoccupation by Japanese officials regarding their damaged currency, according to Ashraf Laidi, a currency analyst at CMC Markets.
The dollar last was down 0.1% against the yen and the euro.
By Nick Godt