Stocks fell on Wednesday as Germany's unilateral action to ban specific trades on some stocks and bonds sparked a fresh wave of uncertainty and risk aversion among anxious investors.
Markets already fear the euro zone's credit woes could cut into economic growth, and Germany's move on Tuesday triggered selling of industrial shares, as they have a heavy exposure to Europe.
It's become increasingly clear that these are still separate countries with their own political agendas, said Kim Caughey, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.
I think that's what's caused nervousness yesterday and today.
Heavy machinery maker Caterpillar Inc slid 2.7 percent to $61.44, while shares of Boeing fell 2.2 percent to $66.21. The S&P industrial index <.GSPI> dropped 1.3 percent.
But not all the news was bad.
The S&P 500 bounced off its 200-day moving average, a key technical level it breached shortly before noon, but which should provide support going forward.
The Dow Jones industrial average <.DJI> dropped 66.58 points, or 0.63 percent, to 10,444.37. The Standard & Poor's 500 Index <.SPX> fell 5.75 points, or 0.51 percent, to 1,115.05. The Nasdaq Composite Index <.IXIC> lost 18.89 points, or 0.82 percent, to 2,298.37.
At the close, both the Dow and the Nasdaq had climbed back into positive territory for the year. But the S&P 500 was just 0.05 of a point below where it ended 2009.
Germany banned investors who don't own or haven't borrowed certain stocks, bonds and derivatives from selling them, in a move that appeared to catch its partners in the European Union off guard.
Housing stocks took a hit as data showed demand for loans to buy homes sank to a 13-year low last week following the expiration of a home buyer's tax credit.
Shares of timber company Weyerhaeuser Co fell 1.2 percent to $43.90 and home builder Hovnanian Enterprises dropped 4.3 percent to $6.17. The PHLX housing index <.HGX> fell 1.5 percent.
Stock indexes barely budged after the Federal Reserve gave an upbeat outlook of the U.S. economy in the minutes of the most recent meeting of its policy-setting committee.
Data showed the U.S. Consumer Price Index fell for the first time in a year last month and the closely watched core inflation rate eked out its smallest annual gain since 1966, further supporting the Fed's vow to keep interest rates low for some time.
On the upside, shares of Deere & Co rose 3 percent to $58.87 after it reported a stronger-than-expected quarterly profit and raised its full-year outlook.
About 12.2 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, well above last year's estimated daily average of 9.65 billion.
Declining stocks outnumbered advancing ones on the New York Stock Exchange by a ratio of about 4 to 1, while on the Nasdaq, about seven stocks fell for every two that rose.
(Reporting by Rodrigo Campos; Editing by Jan Paschal)