The Dow Jones Industrial Average fell 84 points to 13,441, despite surging nearly 100 points early on to a new record high of 13,457. The Dow was weighed by the likes of Intel Corp. , Disney , and Microsoft Corp. .
The S&P 500 dropped 12 points to 1,509, while the Nasdaq Composite eased 35 points to 2,541.
Adding to investor anxiety, talks between China and the U.S. failed to avert a trade war.
The U.S. stock market has been stuck in a range with the S&P 500 index unable to break convincingly above seven-year highs.
"We've had an incredible two months, so it's not surprising that the S&P couldn't hold the old high," said Paul Mendelsohn, chief investment strategist at Windham Financial Services. "But the market saw some real technical damage today," he said.
Among blue-chip shares, Boeing Co. gained 2% to an all-time high, bouncing back from the previous session when it affirmed its earnings outlook for 2007 and 2008. Although the outlook disappointed investors on Wednesday, analysts on Thursday said the selling pressure provided a good buying opportunity for the stock.
General Motors fell 3%. In a filing with the Securities and Exchange Commission, GM said it sees a $7 billion exposure from helping Delphi get out of bankruptcy. GM previously said it would cost between $6 billion and $7.5 billion.
Trading volumes showed 1.7 billion on the New York Stock Exchange and 2.4 billion on the Nasdaq stock market. Declining issues topped gainers by 26 to 6 on the NYSE, while declining issues topped gainers by 22 to 7 on the Nasdaq.
China still in play
The U.S. and China held economic talks this week, which were aimed at easing trade tensions between the two.
But "I think those Chinese negotiations are not going all that well," said Windham's Mendelsohn. "And if Congress passes trade restrictions, whether or not the administration vetoes them, this wouldn't be good news and could pull the rug under the market."
By sector, airlines , financials and consumer issues led the gains, while and software declined.
Economy back in play
Stocks earlier jumped after news that sales of new U.S. homes unexpectedly surged 16% in April, to a seasonally adjusted annual rate of 981,000, the Commerce Department said Thursday.
The number far exceeded the 865,000 pace expected.
Sales, however, were boosted by plunging prices. While the inventory of unsold homes fell by 1.5%, the median price of a new home plunged 10.9% over the past year.
"This is a blockbuster number but the beneath the curtain, we still see signs of weakness," said Kathy Lien, chief strategist at DailyFX.com.
The huge drop in the price of median homes, she noted, "means that builders are basically putting a fire sale on inventory."
"What will be most important is whether there is a divergence between existing and new home sales tomorrow as existing home owners may be more price sensitivity and in less of an urgency to sell," she said.
The data still offset concerns about homebuilders. Toll Brothers rose 1% even after reporting a huge drop in earnings compared with the year earlier. Toll Brothers also said that it's not comfortable giving full earnings guidance.
Among other homebuilders, shares of Hovnanian Enterprises Inc. gained 0.7%, while KB Home rose 0.7%.
The market had already received better-than-expected news about business spending.
New orders for U.S.-made durable goods increased 0.6% in April, boosted by strong demand for metals.
Orders in March rose a revised 5%, a six-month high, compared with a 4.3% estimate previously. Orders fo core capital equipment goods - the best monthly gauge of business investment - rose 1.2% after a 4.4% gain in March.
Economists surveyed by MarketWatch were looking for no change in durable goods orders in April. The data seems to confirm other data showing improvement in the manufacturing sector.
On Wednesday, the market had also reversed previous gains to close lower, after Greenspan said he feared the Chinese stock market was headed for a "dramatic correction."
Overnight, the Shanghai Composite fell 0.5%, with the Chinese government warning about the risks of investing in China's booming stock market.
U.S. stocks, which have rallied almost without interruption since mid-March, fell back as trading volumes were light in the run up to the three-day Memorial Day weekend, traders said.
Marc Pado, chief market strategist at Cantor Fitzgerald, said that second day of selling might confirm a trend reversal for the market.
Crude and gasoline futures bounced off their lowest levels in a week Wednesday to close modestly higher, as increases in U.S. supplies of both commodities failed to fully offset concerns over renewed tension in the Middle East and a forecast for a particularly active Atlantic hurricane season. Crude oil finished up 26 cents to finish at $65.77.
Gold futures slipped $9.30 to close at $653.30 an ounce as the dollar rose and oil fell.
The dollar was up against the euro and flat against the yen, after the economic data.
Bonds, however, fell, with the yield of the benchmark 10-year Treasury bond rising to 4.857%.
Network Appliance stumbled 16% after the storage-technology company said a brief slowdown in March will cause it to deliver weaker-than-forecast results for its current quarter. "We hit an air pocket and we never made up the difference," according to CFO Steve Gomo.
Software companies CA and Synopsys also issued earnings outlooks below market expectations.
Limited Brands fell 1.5% after reporting a 47% profit fall and saying sales at Victoria's Secret continue to be weak.
Apparel retailers Gymboree and Abercrombie & Fitch all rose after their quarterly results.
By Nick Godt