Stocks tumbled about 2 percent on Tuesday after the deal to rescue Greece and prevent a wider sovereign debt crisis was thrown into disarray.
Adding to the gloomy sentiment, factory activity in Asia's big export economies slowed to their weakest rate in nearly three years in October, while UK manufacturing suffered a sharp decline, reigniting fears of a global slowdown.
Despite the negative market reaction, stocks were able to stay above a key technical level and held on to most of the massive gains posted last month. Equities posted their best month in 20 years in October.
Greek Premier George Papandreou said he will put the nation's bailout deal through a referendum, potentially undoing a long-awaited agreement struck last week and sending European stocks down 3.3 percent. The region's bank shares fell 6.4 percent.
European leaders feel as if they've been blindsided by Papandreou, said Chad Morganlander, portfolio manager at Stifel, Nicolaus & Co in Florham Park, New Jersey.
He said the move underscored the current risk in Europe and threw a wrench into the region's stability plan.
U.S. bank shares were lower, with the KBW bank index off 3 percent and Morgan Stanley down 7.4 percent to $16.33.
The Dow Jones industrial average slid 213.42 points, or 1.79 percent, at 11,741.59. The Standard & Poor's 500 Index dropped 25.13 points, or 2.01 percent, at 1,228.17. The Nasdaq Composite Index was down 52.81 points, or 1.97 percent, at 2,631.60.
The S&P 500 traded below its 14-day moving average for the first time since October 7, pointing to a possible shift in short-term momentum. The benchmark broke, then went above strong support at 1,220.
The latest U.S. data showed the pace of growth in the manufacturing sector unexpectedly slowed in October, though it managed to stay in expansion territory.
In a move that further weighed on commodity prices and risky assets, Japan vowed to step into foreign exchange markets again to curb excessive speculation. The government sold a record 7.7 trillion yen ($98.7 billion) on Monday to curb the yen's strength, which is hurting its export-based economy.
The U.S. dollar index rose 1.6 percent. U.S. oil futures dropped 2.9 percent, and copper prices fell 3.2 percent. Many commodities are priced in the greenback, making a spike in dollar prices more expensive for traders in other currencies and saps demand.
(Reporting by Rodrigo Campos; editing by Jeffrey Benkoe)