Stocks fell on Wednesday as investors worried that China's banks might be ready to hit the brakes on lending to stem market excesses, a move that could curb the global economic recovery.
Concerns about China hurt commodity prices and hit shares in the energy and raw materials sectors, while a steep drop in U.S. durable goods orders in June fed fears of more economic weakness.
Oil futures fell $3.88, or 5.8 percent, to settle at $63.35 per barrel after U.S. government data showed a surprisingly large increase in crude inventories last week. Shares of energy companies also slid, with Chevron Corp
China has been a big driver of part of the global recovery. Their stimulus is direct and quick, said Bobby Harrington, managing director of Boston trading for UBS.
Slower growth in China's economy could limit upside and create downward momentum in the U.S. stock market, he said.
China's two biggest state-owned commercial banks have put a lid on their 2009 lending targets, according to domestic media reports, a move that will significantly slow overall Chinese credit growth in the year's second half.
The Shanghai Composite Index <.SSEC> sank 5 percent on Wednesday -- its biggest daily decline in eight months, but it is still up about 80 percent for 2009.
Further weighing down stocks, yields of shorter-dated U.S. Treasuries briefly hit five-week highs while their prices plunged after the week's second poor auction, increasing concern of a possible spike in borrowing costs.
The Dow Jones industrial average <.DJI> dropped 26 points, or 0.29 percent, to close at 9,070.72. The Standard & Poor's 500 Index <.SPX> fell 4.47 points, or 0.46 percent, to 975.15. The Nasdaq Composite Index <.IXIC> lost 7.75 points, or 0.39 percent, to 1,967.76.
Each of the three major U.S. stock indexes gained 11 percent in the previous two weeks as upbeat corporate earnings gave a second wind to a rally that drove the S&P 500 up 40 percent from a 12-year closing low hit in early March.
On Wednesday, the S&P 500's only positive sectors were telecommunication services, healthcare and consumer staples, the ones seen as able to better weather economic downturns.
After the big run-up, people get a bit more defensive, UBS's Harrington said.
The Commerce Department said June U.S. durable goods orders fell 2.5 percent, the largest drop since January, after rising by a downwardly revised 1.3 percent in May. Durable goods are manufactured goods such as washing machines, refrigerators and cars, intended to last three years or more.
Natural resources stocks tracked commodity prices down, with miner Freeport-McMoRan Copper & Gold Inc
Among the Nasdaq's major decliners, Yahoo Inc
Yahoo's stock plunged 12.1 percent to $15.14 as some investors were disappointed by the deal's scope. In contrast, Microsoft's stock was up 1.4 percent at $23.80.
Shares of Google Inc
In earnings-related news, shares of Sprint Nextel Corp
Shares of ConocoPhillips
Volume was light on the New York Stock Exchange, where about 1.25 billion shares changed hands, less than last year's estimated daily average of 1.49 billion. On the Nasdaq, about 2.10 billion shares traded, less than last year's daily average of 2.28 billion.
Decliners outnumbered advancers on the NYSE by a ratio of about 3 to 2. On the Nasdaq, eight stocks fell for every five that rose.
(Editing by Jan Paschal)