United States stocks fell lower as the continuing stalemate in Washington led investors to cash out of the market's strongest performing sectors.
The Dow Jones Industrial Average extended earlier losses, falling 103 points, or 0.7%, to 14,833 points. On Monday, the Dow fell 136 points, or 0.9%, to close at a one-month low. On Tuesday it was down for the eleventh time in 14 sessions.
The S&P 500 index lost 15 points, or 0.9%, to 1,661 points, with economically sensitive names lagging, while the defensive sectors of utilities and consumer staples saw gains.
The Nasdaq Composite Index dropped 69 points, or 0.8%, to 3,702 points.
Utilities, which have underperformed this year, were bucking the broader down trend Tuesday, adding 1.1%. The shift into defensive stocks and away from more economically sensitive names is also evident in the bigger drop in the tech-intensive Nasdaq Composite, said Matthew Cheslock, a trader with brokerage firm Virtu Financial.
"People can talk about a great buying opportunity, or how much money they are waiting to put to work, but we're not seeing anyone ready to step in right now," Mr Cheslock said.
"Scared money will wait until there is something closer to a resolution than we have now."
Increasing worries that a prolonged political gridlock could continue past the deadline to raise the debt ceiling have weighed on investor sentiment. The S&P 500 has fallen 2.9% from its record closing high of 1725.52 on Sept. 18.
"The shutdown is now a sideshow. This is fully about the debt ceiling," said Quincy Krosby, a market strategist at Prudential Financial, which manages roughly $1 trillion in assets.
Concern over a potential US default was evident in Tuesday's bill auction. The Treasury Department sold $30 billion worth of four-week bills maturing on Nov. 7 at a rate of 0.355%, the highest yield since Oct. 2008.
Money-market funds and banks are dominant buyers of Treasury bills to park their idle cash for a short period, but they have shied away from the auction. The bid-to-cover ratio, a gauge of investor demand, was 2.75 times, down from 3.09 times a week ago.
"It was an awful auction," said Priya Misra, head of US rates strategy research at Bank of America Merrill Lynch.
In another sign of weak demand, the "tail," or the difference between the highest yield on the securities during the auction and the expected high yield when the auction first gets started, was as big as 0.05%, the largest since March 25, 2008, according to Bank of America.
Senate Democrats are planning a vote this week to extend the borrowing limit through 2014, but House Republicans said they won't pass any debt-limit extension unless it includes deficit-reduction measures.
"Earnings season is about to begin. But the fact is, the focus remains on the political impasse," said Peter Cardillo, chief market economist at Rockwell Global Capital.
Alcoa slipped as it prepares to unofficially kick off the third-quarter earnings reporting season with its results after the closing bell. The company beat earnings estimates the past two quarters.
Earlier, the National Federation of Independent Business' small business optimism index for September slipped to 93.9 from a revised 94.1 in August, but topped expectations of 93.3.
Data on the August trade deficit and on jobs openings and labor turnover originally scheduled for Tuesday are postponed due to the government shutdown.
October gold futures recovered from earlier losses to add 0.1% to $1,326.60 an ounce. On Monday, worries about the budget stalemate sent the safe-haven metal up 1.2%, the first gain in three sessions.
November crude-oil prices rose 0.7% to $103.75 a barrel. The dollar gained ground against the yen and inched higher against the euro.
European markets fell, with the Stoxx Europe 600 down 0.8%, after disappointing data out of Germany. Manufacturing orders in the euro zone's largest economy declined in August for a second-straight month versus expectations of an increase, due to a large drop in foreign orders. Germany's DAX 30 index lost 0.4%.
Asian markets erased early losses to close mostly higher. Mainland Chinese markets reopened after being closed for a weeklong holiday. The Shanghai Composite climbed 1.1% after being down 0.6% at its intraday low. Japan's Nikkei Stock Average rose 0.3%.
In corporate news, J.C. Penney rallied after the retailer said the year-over-year decline in same-store sales slowed last month, and it expects the improved sales trends it saw in September to continue through the rest of the year.
The US-listed shares of Alcatel-Lucent fell after the Franco-American telecom-gear maker said late Monday it plans to cut about 10,000 jobs world-wide as part of a restructuring.
Jamba tumbled after lowering its outlook for several key metrics for the fiscal year, as the smoothie company faced a slowdown in consumer spending, adverse weather in key markets and increased competition.
Talisman Energy rose with news Carl Icahn acquired a nearly 6% stake in the Calgary, Alberta-based oil and gas producer. The activist investor said he plans to have conversations with management about board seats and strategic alternatives.