After Dutch officials failed to agree on budget cuts, the Dutch prime minister tendered his government's resignation on Monday. Adding to the turmoil was the possibility of a socialist victory in France, which cast doubts on public support for future euro zone austerity measures.
The renewed uncertainty came as the euro zone's business slump deepened at a far faster pace than expected in April.
The selloff was broad with seven stocks on the New York Stock Exchange falling for each one that rose. Composite volume was heavy, with nearly 40 percent of the recent daily average traded by late morning.
The economically sensitive S&P materials sector was the worst performer, down 1.9 percent.
Clearly there is political uncertainty, but what always magnifies or amplifies political uncertainty is when there is growth uncertainty as well, said Paul Zemsky, head of asset allocation at ING in New York. It's the worst of both worlds today.
The Dow Jones industrial average slid 147.24 points, or 1.13 percent, at 12,882.02. The Standard & Poor's 500 Index was down 15.81 points, or 1.15 percent, at 1,362.72. The Nasdaq Composite Index tumbled 43.56 points, or 1.45 percent, at 2,956.89
Wal-Mart Stores Inc. slumped nearly 5 percent to $59.42 and was the Dow's biggest decliner after the New York Times reported company officials stymied an internal investigation into bribery allegations at its Mexican unit. Walmart de Mexico shares slid almost 12 percent.
Europe's debt crisis has been a major headwind for equities as investors worried it may affect corporate profits. While the S&P snapped a 2-week losing streak on Friday, it is down about 4 percent from a closing high in early April.
Europe is driving the boat right now, and there's no reason to think that investor anxiety will dissipate any time soon, said Joe Cogan, vice president of international equities at Topeka Capital Markets in New York.
In addition, the market has been due for a pullback, and I think we could see another two to three percent of downside before investors come back in the market.
Materials shares followed a fall in commodity prices as copper slumped 2 percent. Shares in Freeport McMoran Copper & Gold Inc fell nearly 2.5 percent $36.65.
The weakness also affected banks. Shares of Morgan Stanley , which have been sensitive to worries about Europe's debt crisis, fell 2.6 percent $17.02. The KBW bank index fell 0.4 percent.
Apple Inc. fell below its 50-day moving average for the first time in four months, drawing buyers and a quick reversal in early trade as the shares briefly turned positive. But by late morning, the general weakness caught up with the stock and it traded down 1.2 percent at $566.34.
Kellogg Co. fell 5.2 percent to $51.15 after the cereal maker cut its full-year profit view.
On the upside, Xerox Corp. rose after reporting quarterly results. Xerox was up 2 percent to $8.03.
So far, earnings have been solid, with more than 80 percent of S&P 500 companies topping consensus profit estimates.
While the results were enough to lift equities last week, many analysts said Wall Street was in a tug of war between corporate results and geopolitical uncertainties from abroad.
(Additional reporting by Ryan Vlastelica; editing by Jeffrey Benkoe)