After giving the market solid gains in August, investors backtracked on the final day of the month after a sell-off in Asia triggered by a sharp drop in Chinese shares.
Stocks fell after a 6.7% plunge in China's main index prompted selling in other countries. The decline in stocks was broad, but the biggest losses were among energy and material companies as prices for commodities like crude and copper plummeted.
The Dow Jones industrial average fell 47.92, or 0.5%, to 9,496.28. The Standard & Poor's 500 index fell 8.31, or 0.8%, to 1,020.62, while the Nasdaq composite index lost 19.71, or 0.9%, to 2,009.06.
The selling of Chinese shares has been fed by concerns over a tightening in bank lending that could hurt that country's economy. China, which has continued to grow despite the global recession, is a major consumer of U.S. exports including commodities. Chinese stockpiling this year of such goods as copper and soy have helped drive up commodities prices.
"As China goes, so goes a lot of the rest of the world," said Brian Nick, investment strategist at Barclays Wealth.
The sell-off in China rattled investors who were already on edge going in to the last trading day of August. With stocks up more than 45% since early March, investors are worried that the market may have gotten too far ahead of the economy. Key reports later this week on manufacturing and employment in August could either upset the market's six-month rally or help push it forward.
Without evidence of actual economic growth, analysts have warned that the market's rally could fizzle in the coming weeks, especially as traders head into September, historically a rough month for the stock market.
"The markets have been looking like they've been somewhat reluctant to hold their gains over the last couple of sessions," said Blaze Tankersley, chief market strategist at Bay Crest Partners, adding that the news out of China provided investors with a good excuse to sell some stocks.
In trading abroad, Japan's Nikkei stock average fell 0.4% after the country's opposition party came to power in a landslide victory. Germany's DAX index fell 0.9%, while France's CAC-40 lost 1.1%. The London Stock Exchange was closed for a holiday.
Oil prices tumbled $2.78 to $69.96 a barrel on the New York Mercantile Exchange. Copper prices lost nearly 5%. Gold also fell as the dollar moved higher against other major currencies.
Demand for the safety of government debt rose Monday, underscoring the market's uneasiness. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.41% from 3.45% late Friday.
Two big acquisitions totaling close to $10 billion did little to excite investors Monday. The Walt Disney Co. said it plans to buy Marvel Entertainment for $4 billion in cash and stock, while oilfield services company Baker Hughes said it will buy BJ Services in a cash-and-stock deal valued at $5.5 billion.
Investors also looked past a report showing an improvement in Midwest business conditions. The Chicago Purchasing Managers index, which measures business activity in Illinois, Michigan and Indiana, jumped to 50.0 in August from 43.4 in July, ending 10 consecutive months of declines.
The index is considered a precursor to the Institute for Supply Management's manufacturing index, which is due Tuesday. A reading above 50 indicates growth in manufacturing, something that hasn't happened since January 2008.
Despite Monday's pullback, stocks are on track to have their best August since 2000. Most of the gains were made earlier this month as investors cheered improvements in consumer confidence and an upbeat assessment of the economy from Federal Reserve Chairman Ben Bernanke.
Trading is expected to be relatively light this week, with many investors taking vacations. But there are still several important reports on the economy that could sway the market one way or the other.
The most closely watched piece of data this week will be the government's monthly jobs report on Friday. Economists are expecting another 220,000 jobs were lost, down from 247,000 in July.
Last month's report showed an unexpected dip in the unemployment rate and investors are anxious to see if the rate continues to fall. If fewer jobs are being lost, consumers might start to feel comfortable spending again and help get the economy back on its feet.
More than four stocks fell for every one that rose on the New York Stock Exchange, where volume came to 567.4 million shares, compared with 617.7 million at the same time on Friday.
In other trading, the Russell 2000 index of smaller companies fell 7.86, or 1.4%, to 572.00.