"Slow growth and higher non-energy-related prices could be a relevant conversation in 2008," said Kevin Giddis, managing director at Morgan Keegan & Co.
"The main thing that's bothering investors is the question: Recession or no recession in 2008?" said Al Goldman, chief market strategist at A.G. Edwards. .
The Dow Jones Industrial Average lapsed 117.6 points to 13,222.2, after falling as far as 13,207.5 earlier in the session, its lowest level since the blue-chip barometer fell under the 13,000 mark on Nov. 28.
Of the Dow's 30 components, 23 were trading lower, led by Caterpillar Inc. , shares of which were down 3.1% following its downgrade to underweight from equal-weight by Morgan Stanley.
Citigroup Inc. recently led the Dow's gainers, its stock up 1.5%.
Broader indexes fell as well, with the S&P 500 declining 12.78 points to 1,455.17, and the technology-laden Nasdaq Composite dropping 33.55 points to 2,600.19.
Shares of Micron Technology Inc. fell 5.4% after several analysts expressed concern about the impact of declining chip prices on the company's financials. .
Volume on the New York Stock Exchange hit 739 million shares, and declining stocks outran those advancing by roughly 2 to 1. On the Nasdaq, more than 1 billion shares changed hands, and decliners outpaced advancing stocks by more than 2 to 1.
On the New York Mercantile Exchange, crude-oil futures fell $1.52 to $89.75 a barrel. .
And in the metals pits, gold futures gained 80 cents to $798.80 an ounce. .
Data before the start of trading showed the New York Federal Reserve Bank reporting factory growth in the Empire State region slowed in December to its lowest reading since May.
And the Commerce Department said the U.S. current-account deficit narrowed in the third quarter to $178.5 billion, representing 5.1% of gross domestic product. .
U.S. stocks closed sharply lower on Friday, as rising inflation dismayed investors already concerned that credit-market turbulence may prompt a recession. The Dow industrials fell 178 points, the S&P 500 lost 20 points and the Nasdaq Composite fell 32 points.
Late Friday, Moody's warned that the Triple-A ratings of several leading bond insurers could be downgraded after it reviews the companies' exposure to potential subprime mortgage losses.
The AAA ratings of Financial Guaranty Insurance Co., partly owned by private-equity giant Blackstone Group LP , and XL Capital Assurance, a unit of Security Capital Assurance , were placed under review for possible downgrade, while the ratings of MBIA Inc. were affirmed, but with the rating outlook changed to negative. .
In televised interviews Sunday, former Fed chief Alan Greenspan warned of the possibility of stagflation, when prices rise at the same time as the economy cools, and said there was a 50-50 chance of a U.S. recession.
Speaking in Fredericksburg, Va., earlier Monday, President Bush acknowledged the economy is facing "challenges," and said it would "take a while" to work through the housing downturn. .
In a similar vein, a monthly survey of builders' attitudes found the industry remained extremely pessimistic in December, matching the lowest reading in the poll's 22-year history.
More than $20 billion in M&A
The market's bearish tone persisted amid a spree of deals to start the week, including Ingersoll-Rand Co. saying it would acquire air-conditioning systems provider Trane Inc. for $10.1 billion in cash and stock. .
In oil services, National Oilwell Varco Inc. said it will buy Grant Prideco in a deal valued t about $7.5 billion.
Meanwhile, insurer Aon Corp. struck agreements to sell two businesses for $2.75 billion. .
Another corporate divestiture involves Plains Exploration & Production Co. , which plans to sell for $1.75 billion energy assets in a pair of transactions to Occidental Petroleum Corp. and XTO Energy . .
Overseas, word surfaced that Air France-KLM has made a non-binding offer to acquire struggling Italian airline Alitalia . .
In Europe, shares fell as worries about rising inflation coincided with mounting credit-market turmoil. .
Asian stocks fell overnight, with Japan's Nikkei Stock Average losing ground as banking shares declined. Australian markets faced heavy selling pressure from commodity stocks. .
By Kate Gibson