Stocks fell for a second day on Thursday as labor market data showed more signs of weakness, while a warning from Qualcomm and poor results from Stanley Black & Decker also discouraged investors.
A late bounce cut the Dow's and the S&P 500's losses almost in half.
Apple shares, down 3.4 percent, also contributed to the day's losses, as did renewed concerns about Europe's finances. Apple closed at $587.44.
Spanish government bond yields increased after a disappointing debt auction and French bond yields rose on rumors, later denied, that the country's credit rating may be downgraded.
Qualcomm Inc led technology stocks lower, falling 6.6 percent to $62.57 a day after it warned of trouble meeting demand for some of its chips. Stanley Black & Decker fell 7.1 percent to $72.91, leading declines among industrials, the second worst-performing of the S&P 500's top 10 sectors.
The losses followed a strong start to earnings season, confirmed Thursday by better-than-expected reports from Bank of America Corp and Morgan Stanley.
Of the 105 S&P 500 components that have reported earnings to date, 81.9 percent have beat analysts' expectations, according to Thomson Reuters data.
Despite the positive beat rate in earnings, some important economic data points have been losing momentum and that has to call into question whether or not this is just a soft patch or something more dramatic, said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.
You overlay that with Europe again dominating the headlines ... it just has investors standing on the sidelines, she said.
Raising concerns about the economic outlook, new U.S. claims for unemployment benefits declined only slightly last week and were well above economists' expectations. Other reports showed factory activity in the Mid-Atlantic region slowed sharply in April and existing home sales dropped in March for a second straight month.
The Dow Jones industrial average fell 68.65 points, or 0.53 percent, to end at 12,964.10. The S&P 500 Index dropped 8.22 points, or 0.59 percent, to 1,376.92. The Nasdaq Composite lost 23.89 points, or 0.79 percent, to 3,007.56.
At their session lows, the three major indexes all fell more than 1 percent.
After the closing bell, Microsoft Corp reported a small drop in fiscal third-quarter profit that still beat Wall Street's forecast. Microsoft's stock rose 2.7 percent to $31.88 in extended-hours trading. In regular trading, Microsoft had slipped 0.4 percent to $31.01.
During the regular session, eBay Inc jumped 13.2 percent to $40.62 a day after the online auctioneer reported that its quarterly sales and profit grew more than expected. Late Wednesday, eBay also raised its 2012 forecasts.
Bank of America, the No. 2 U.S. bank, fell 1.7 percent to $8.77 after spending the morning higher. In contrast, Morgan Stanley rose 2.3 percent to $18.07. Both reported better-than-expected results. The S&P financial sector index fell 0.5 percent.
Biotechnology companies' gains helped shield the Nasdaq from a bigger loss, as the stock of Human Genome Sciences Inc soared 98 percent to $14.17 - nearly doubling its price in Thursday's session - and shares of Gilead Sciences Inc shot up 12.1 percent to $52.25.
Human Genome rejected an unsolicited $2.6 billion bid from long-time partner GlaxoSmithKline.
A combination of experimental hepatitis C drugs from Gilead and Bristol-Myers Squibb Co showed impressive results in new clinical trial data released on Thursday.
The Nasdaq biotech index climbed 1.5 percent.
About 7.43 billion shares changed hands on the New York Stock Exchange, the Nasdaq and the NYSE Amex, compared with the average 6.78 billion so far this year.
Declining issues beat advancers on the NYSE by a ratio of about 7 to 5 while on the Nasdaq, five issues fell for every three that rose.
(Reporting by Rodrigo Campos; Editing by Jan Paschal)