"There is definitely concern about economic growth when you look at what is selling," said Owen Fitzpatrick, head of U.S. equity group at Deutsche Bank. "The most disappointing aspect of today's market is we're finally getting a couple of companies flush with cash announcing acquisitions and the equities market is selling off."
The Dow Jones Industrial Average dropped 172.6 points, or 1.3%, to 13,167.2, its lowest close since the blue-chip barometer fell under the 13,000 mark on Nov. 28.
Of the Dow's 30 components, 27 closed lower. Caterpillar Inc. led the losers in the group, down 3% following its downgrade to underweight from equal-weight by Morgan Stanley.
Citigroup Inc. paced the Dow's gainers, its stock up 0.2%.
Broader indexes fell as well, with the S&P 500 declining 22.05 points, or 1.5%, to 1,445.9, and the technology-laden Nasdaq Composite dropping 61.28, or 2.3%, points to 2,574.46.
Tech stocks were hardest hit, with Fitzpatrick pointing to worry about third-quarter earning results due Thursday from Research In Motion Ltd. , with the company's shares down 5.1%.
Shares of Micron Technology Inc. fell 5.7% after several analysts expressed concern about the impact of declining chip prices on the company's financials. .
Volume on the New York Stock Exchange topped 1.4 billion shares, and decliners outnumbered advancers by more than 5 to 1. On the Nasdaq, more than 1.9 billion shares changed hands, and decliners topped advancing stocks, also by more than 4 to 1.
On the New York Mercantile Exchange, crude-oil futures fell 64 cents to end at $90.63 a barrel. .
And in the metals pits, gold futures gained $1.3 to $799.3 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.
The Commerce Department reported the U.S. current-account deficit narrowed in the third quarter to $178.5 billion, representing 5.1% of gross domestic product. .
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, Greenspan, the former Fed chairman, 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.
"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. .
Speaking in Fredericksburg, Va., 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 at about $7.5 billion.
Meanhile, 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