Wall Street fell for a sixth day on Monday on renewed angst about Washington's ability to reach a deal on raising the U.S. debt ceiling and following disappointing news from the manufacturing sector.
By late afternoon, the three major U.S. stock indexes were off session lows after cutting earlier losses of slightly more than 1 percent. The retracement of some of that lost ground appeared to occur around the time when U.S. Vice President Joe Biden predicted passage of a bill to increase the nation's debt ceiling. The legislation is needed to avert default.
Still, the S&P 500 looked set to close just a touch below its 200-day moving average for the first time in a year. The level has acted as strong support over the past two months and its breech on a closing basis would be a worry for investors.
An early morning rally in equity markets that began in Asia last night after a deal in Washington seemed close was swiftly eroded as politicians seemed to struggle throughout Monday to bring the deal to a close.
The defense and health care sectors, which would be subject to U.S. budget cuts if a deal isn't reached, were among the hardest hit. The iShares Dow Jones U.S. aerospace and defense exchange traded fund fell 2.1 percent while S&P's healtcare index lost 2 percent.
"The market is just nervous that they can't even get this deal done, they can't even get a watered-down deal done," said Marc Pado, U.S. market strategist, Cantor Fitzgerald & Co. in San Francisco.
In another worrisome sign for the economy, the Institute for Supply Management (ISM) reported that the U.S. manufacturing sector grew at the slowest pace in two years in July. The ISM report, which followed similarly weak reports from much of Asia and Europe, also showed new orders contracted.
The Dow Jones industrial average shed 37.50 points, or 0.31 percent, to 12,105.74. The Standard & Poor's 500 Index fell 6.97 points, or 0.54 percent, to 1,285.31. The Nasdaq Composite Index dropped 21.96 points, or 0.80 percent, to 2,734.42.
"One has to carefully consider this economic data point as an indication of a continuing slowdown, which will perhaps bleed into earnings," said Chad Morganlander, portfolio manager at Stifel, Nicolaus & Co in Florham Park, N.J. "It indicates a lack of vitality that would improve employment."
If lawmakers approve the debt deal before the Tuesday deadline, it may end months of debate over whether the U.S. can avoid a debt default.
Lawmakers were due to vote later Monday on the White House-backed agreement, which includes spending cuts of $2.4 trillion over 10 years.
Even though a default was considered unlikely by many investors, the threat of a credit rating downgrade continued to weigh on sentiment after Wall Street marked its worst week in a year last week.
The S&P 500 was just below its 200-day moving average at 1,285.37, which had been pegged as support.
"We're moving toward the lower end of (a trading) range, so investors are getting more nervous," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Conn.
Shares of United Health slid 4.1 percent to $47.61 while Humana Inc. dropped 3.2 percent to $72.23, despite Humana reporting a higher-than-expected second-quarter profit.
Among other health-care stocks, shares of Pfizer shed 1.5 percent at $18.96.
(Reporting by Edward Krudy; Editing by Jan Paschal)