United States stocks made broad declines Monday, as it looked unlikely during the trading session that Congress would reach a deal to avoid a partial government shutdown.
The Dow Jones Industrial Average dropped 128.57 points, or 0.8%, to 15129.67 points.
The S&P 500-stock index shed 10.20 points, or 0.6%, to 1,681.55 points, with all 10 sectors lower.
The Nasdaq Composite Index fell 10.12 points, or 0.3%, to 3,771.48 points.
Even with Monday's losses, stocks have posted a strong performance in recent months. The S&P 500 is up 3% for the month and 4.7% in the third quarter.
"Despite the naysayers, it looks like September is turning out to be a positive month," said Alan Gayle, who oversees about $325 million as senior investment strategist at RidgeWorth Investments. "But the uncertainty surrounding the [budget] and debt ceiling makes investors nervous."
At the closing bell Monday, lawmakers had hours left to settle on a budget deal. But, after a weekend spent solidifying their positions, the government appeared to be headed for a partial shutdown for the first time since 1996.
While buyers were hanging back, investors said they aren't rushing for the exits, as they expect a shutdown but don't expect it to last long.
"Most people are coming to terms with the fact that the government is likely going to be shut down, but that won't have a meaningful impact on the economy, or on markets, for a long time," said Joseph Tanious, global market strategist at J.P. Morgan Funds.
A more pressing concern for markets has been the next battle in Congress--the debate over raising the debt ceiling.
"The hope is that though we have a short-term government shutdown, [the tension] doesn't spill over into the debt-ceiling debate," said Mr. Tanious. "That would be far more serious."
He remains bullish on US stocks, however, and doesn't expect a US default.
Stocks sold off sharply at the market's open as worries spread about budget negotiations, but benchmarks have since recovered some of their losses. At its session low, the Dow industrials had shed 172 points. Traders said that market action indicated little panic.
"In the morning, there was an attempt to press the market lower … then the buyers stepped in," said Viren Chandrasoma, managing director in equity trading at Credit Suisse Group AG.
Though stocks extended their losses ahead of the closing bell, Mr. Chandrasoma said the late decline was mostly technical, driven by investors paring positions at the end of the quarter.
Small stocks lost less than their larger peers, another sign that investors weren't rushing for the exits. The Russell 2000 Index, a benchmark for small-capitalization stocks, was down less than 0.1% for the day.
The battles in Congress have been weighing on markets for more than a week. The S&P 500 has lost 2.5% since closing at an all-time high of 1725.52 on Sept. 18.
"It's frustrating, because this shouldn't be part of the investment landscape," said Nicholas Colas, chief market strategist at New York-brokerage firm ConvergEx Group. "It should be something that we should be able to take for granted--that the government shouldn't shut down, and that it shouldn't default on its debts."
Investors will also have to contend with some key economic data points this week. A measure of manufacturing activity is scheduled for Tuesday, a service-sector business activity reading will come Thursday, and then Friday will bring the closely watched government employment report for September.
The labour market is a main driver of Federal Reserve policy decisions, so the strength of Friday's report could help determine when the central bank starts to pare its stimulus efforts.
"This is a jam-packed week of economic releases," said J.P. Morgan's Mr. Tanious. "In a normal week, every one of these releases would take center stage. Unfortunately, Washington's theatrics are overshadowing the data."
Political turmoil in Italy also weighed on global stock markets. The Stoxx Europe 600 was down 0.6% as another political crisis in Italy brewed. Italian stocks and bonds fell after conservative leader Silvio Berlusconi pulled his support for the ruling coalition over the weekend. Italian Prime Minister Enrico Letta said he would seek a confidence vote on Wednesday in an effort to keep the government from collapsing.
Italy's FTSE MIB stock index dropped 1.2%, while yields on 10-year Italian government bonds hit the highest levels since June.
Asian markets were also mostly lower, led by a 2.1% slide in Japan's Nikkei Stock Average on the back of US worries and a strengthening yen. HSBC's China Manufacturing Purchasing Managers' Index for September was revised down to 50.2 from a preliminary reading of 51.2, but still showed some improvement from August's 50.1. Readings above 50 signal expansion. China's Shanghai Composite, which will be closed the rest of the week for the National Day holiday, gained 0.7% to buck the regional trend.
The yield on 10-year Treasury notes pulled back slightly, to 2.614% from 2.620%, where it settled Friday. Yields move inversely to prices.
Crude-oil futures fell 0.5% to settle at $102.33 a barrel. Gold futures eased 0.9% to $1,326.50 a troy ounce. The dollar slipped against the yen and edged up against the euro.
The Institute for Supply Management's Chicago-area purchasing managers index for September rose by more than expected, to 55.7 from 53 in August. Economists had forecast a reading of 54. Readings above 50 indicate expansion.
In corporate news, J.C. Penney Co. Inc. slipped 2.7%. On Friday, the stock tumbled 13% to the lowest close since December 2000 after the retailer sold 84 million shares, priced at a 7.4% discount to the stock's closing price on Thursday.
Tesla Motors Inc. rose 1.3% to hit a new all-time closing high, continuing a rally fueled in part by last week's news that Hertz Global Holdings Inc. added one of the electric car maker's models to its high-end rental line-up. The stock has more than quadrupled in value this year.