The Dow Jones Industrial Average declined 40 points, or 0.3%, to 13,509.
Of the Dow's 30 components, seven traded higher. Among the biggest decliners were General Motors Corp. , whose shares fell 1.4% to $26.16, Wal-Mart , down 1.1% to $48.20, and Citigroup , down 1.6% at $30.51.
Bucking the negative trend, shares of Exxon Mobil Corp. gained 1% to stand at $94.62, as crude-oil futures rallied.
Fellow blue chip Caterpillar Inc. also rose, tacking on 1.3% to $73.60.
"Obviously, it's a little disappointment in retail sales and of course the market had a nice run-up going into Christmas," said Peter Cardillo, chief market economist at Avalon Partners.
"It's a little bit of profit-taking. Volume is light. We're still on holiday trading volume with Europe closed," Cardillo said.
The S&P 500 dropped 4.74 points, or 0.3%, to 1,491.77, while the technology-laden Nasdaq Composite fell 8.95 points, or 0.3%, to 2,704.
On the New York Stock Exchange, more than 306 million shares were traded, with declining stocks outpacing advancing stocks by 19 to 11.
More than 485 million shares exchanged hands on the Nasdaq, with decliners beating advancers 17 to 10.
In a shortened trading session Monday, the Dow rose 99 points, or 0.7%, to finish at 13,549.33.
Mixed retail sales
U.S. Redbook chain-store sales rose 1.2% for the week ended Dec. 22 compared to year-ago sales, but December-to-date figures showed a drop of 0.7% compared with a similar period in November, according to Action Economics.
"That news follows the mixed readings on holiday sales figures to date and news that Target fell shy of sales forecasts, which has not inspired the stock market," the Action Economics analysts said.
Retail shares declined, with the S&P Retail Index falling 1.6%.
Shares of Target , the No. 2 U.S. discounter following Wal-Mart, fell 2.9% to $50.92.
The company warned on Monday that December sales at stores open at least a year, a key industry measure of performance, were running well below plan and might decline. Separately, hedge fund Pershing Square said Monday that it boosted its holding in Target to nearly 10%.
Shares of department-store mainstay Macy's Inc. tumbled 5.9% at $25.44.
Holiday retail spending rose 3.6% from a year earlier, led by luxury-goods and electronic-commerce purchases, MasterCard Advisors LLC said on Wednesday.
The big picture
But Chuck Lieberman of Advisors Capital Management, for one, said investors should look at the big picture, instead of focusing on Target's soft December and another big drop in home prices.
"When you really look at the whole picture, as opposed to focusing on a couple of trees that are doing pretty badly, the economy is doing surprisingly well," Lieberman said. Bad housing news is losing its sting, he noted, and as for retail, "expectations were pretty dismal, and the numbers are coming in above those dismal expectations."
Regarding Wednesday's market weakness, he said: "The market was strong on Monday, and I suspect that's why things are a little bit softer today."
In other economic news, home prices in 20 major U.S. cities were down 6.1% on average in the past year as of October, according to the Case-Shiller price index released by Standard & Poor's. Since October 2006, prices in 10 cities fell 6.7% -- a record drop. The prior largest decline was 6.3%, reached in April 1991.
"No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim," said Robert Shiller, chief economist at MacroMarkets LLC and co-developer of the index.
Shares of Berkshire Hathaway
gained after the company said it will purchase 60% of Marmon Holdings, an industrial group owned by trusts benefiting members of the Pritzker family of Chicago, for $4.5 billion.
Berkshire, the investment firm controlled by the Omaha investor Warren Buffett, also will acquire the rest of Marmon in stages over five to six years, with payment based on earnings.
Shares of Merrill Lynch & Co. dipped 0.3% to $53.75. The investment bank said on Monday that it will raise up to $6.2 billion by placing common stock with Temasek Holdings and Davis Selected Advisors.
In other markets, gold futures rallied $12.10 at $828.60 an ounce on the New York Mercantile Exchange, as dollar weakness boosted investment demand for the precious metal.
In the Nymex energy pits, crude-oil futures rose for a third day, up more than $2 to pass the $96-a-barrel mark, on expectations that U.S. crude inventories may have fallen for a sixth week and on worries that Turkish air strikes inside Iraq may cripple oil supplies from the Middle East.
Treasurys edged higher in thin trading, reversing early losses and pushing down yields, as the losses in stocks and the downbeat home-price data supported prices.
In currencies, the dollar index, which tracks the performance of the greenback against a basket of other major currencies, fell 0.6% at 77.160.
European markets were closed on Wednesday for the Boxing Day holiday.
In Asia, stocks finished mostly higher, with Japan's Nikkei 225 ending at its highest level in two weeks as automotive shares such as Toyota Motor Corp. gained.
By Polya Lesova