The euro zone's business slump deepened at a far faster pace than expected in April as European factories had their worst month since June 2009.
In addition, the Netherlands government failed to agree on budget cuts over the weekend, making elections in the core euro zone member almost unavoidable. The developments cast doubt on the country's support for future euro zone measures.
Europe is driving the boat right now, and there's no reason to think that investor anxiety will dissipate any time soon, said Joe Cogan, vice president of international equities at Topeka Capital Markets in New York. In addition, the market has been due for a pullback, and I think we could see another 2 to 3 percent of downside before investors come back in the market.
Europe's debt crisis has been a major headwind for equities as investors worried it may affect growth and corporate profits. While the S&P snapped a 2-week string of losses on Friday, it is down about 4 percent from a closing high in early April.
The Dow Jones industrial average slid 162.75 points, or 1.25 percent, at 12,866.51. The Standard & Poor's 500 Index was down 17.82 points, or 1.29 percent, at 1,360.71. The Nasdaq Composite Index tumbled 44.56 points, or 1.49 percent, at 2,955.89.
Wal-Mart Stores Inc. dropped 4.4 percent to $59.69 and was the Dow's biggest decliner after the New York Times reported officials at the retailer stymied an internal investigation into allegations of extensive bribery at its Mexican subsidiary.
Kellogg Co. fell 4.5 percent to $51.55 after the cereal maker cut its full-year profit view.
On the upside, both Xerox Corp. and D.R. Horton Inc. rose after reporting results. Xerox was up 1.3 percent to $7.98, and homebuilder Horton added 2.4 percent to $15.75.
So far, earnings have been solid, with more than 80 percent of S&P 500 companies topping consensus profit estimates.
While the results were enough to lift equities last week, many analysts said Wall Street was in a tug of war between corporate results and geopolitical uncertainties from abroad.
(Editing by Jeffrey Benkoe)