"The interest rate situation bears watching," said Kevin Kruszenski, head of trading at KeyBanc Capital Markets. "People are also getting nervous about earnings misses, after TI guided lower."
The yield of the benchmark 10-year Treasury bond rose to 5.246% after an auction of new issues showed lukewarm demand and after stronger-than-expected inflation out of China.
The Dow Jones Industrial Average finished down 129 points at 13,295, after rising to a high of 13,449 and falling to a low of 13,294.
"The pull-back is not over, but all the volatility we're seeing is due to the expiration of options," said Peter Cardillo, chief market economist at Avalon Partners.
Out of the Dow's 30 components, 27 stocks retreated, led by AT&T Inc. , American Express , Citigroup Inc. , General Motors Corp. , Hewlett-Packard Co. , Disney and Wal-Mart Stores Inc. .
The S&P 500 lost 16.1 points to 1,493, while the Nasdaq Composite fell 22.4 points to 2,549.
Trading volumes showed 1.6 billion shares exchanging hands on the New York Stock Exchange and 2.1 billion shares trading on the Nasdaq. Declining issues topped gainers by 7 to 1 on the NYSE and by 22 to 7 on the Nasdaq.
By sector, gold , semiconductors , airlines , biotechnology and Internet shares were all falling heavily.
Pressuring the tech sector, Texas Instruments Inc. dropped 2.1% after it reduced the top end of its second-quarter earnings forecast, citing weaker-than-expected sales of its calculators and wireless devices.
In other technology developments, Apple Inc. is planning to launch a new version of its Safari browser, according to reports. The browser will run on Microsoft Corp.'s Windows operating system.
Bonds call the shots
The market again took its cues from the bond market. Treasurys were pressured by overnight news that China's May inflation accelerated at its fastest pace in more than two years.
Adding to those concerns, an auction of 10-year Treasury bonds showed waning demand.
A short reprieve was seen after a speech by former Federal Reserve Chairman Alan Greenspan, who was quoted by press services as saying he is not worried that foreigners will sell their Treasurys.
The 10-year Treasury note finished down 22/32 at 94-9/32, with a yield of 5.246%.
Bonds, which are fixed-income assets, lose value as inflation rises. While the U.S. economy has been slowing and the Federal Reserve has kept rates steady since last year, global growth has picked up some steam leading to higher bond yields overseas and putting central banks on watch for inflation.
"That idea of reflation worldwide means we have to keep an eye on what's going on overseas," said KeyBanc's Kruszenski. "At the same time, we're getting some key [U.S.] economic data on inflation starting tomorrow."
May import prices will be released on Wednesday, along with retail sales and the Federal Reserve's Beige Book of economic conditions. On Thursday and Friday, investors will focus on key producer and consumer prices.
The dollar was higher against the euro but down against the yen. Trade could be more active on Wednesday when the Treasury Department releases its semi-annual report on global exchange rate policies.
Commodities were under pressure. The front-month crude oil contract finished off 62 cents at $65.35 a barrel. The International Energy Agency increased its global demand outlook for petroleum products, but analysts expect Wednesday's U.S. data to show an increase in refinery utilization as well as a climb in motor gasoline supplies for a sixth week in a row.
Gold future also moved down, losing $5.90 to close at $653.10 an ounce, amid dollar strength and falling crude oil prices.
Broker/dealers , which tend to lead the market, were also falling amid concerns about rising interest rates.
Bucking the trend, Lehman Brothers gained 0.5% after the Wall Street bank posted a 25% rise in quarterly revenue and earnings that outpaced the predictions of Wall Street analysts.
Elsewhere, Dow Jones Co. Inc. , the publisher of this report, was again in the news. The Bancroft family, which controls a preponderance of the voting shares of the company's stock, is planning to send its suitor News Corp. a proposal for a board to safeguard The Wall Street Journal's editorial independence.
YouTube, which is being bought by Google Inc. , is going to test video fingerprinting technology to identify clips by companies such as Time Warner Inc. and Walt Disney Co. .
By Nick Godt