Banks took the biggest losses amid a slump in US stocks as investors worried about the financial health of Germany's Deutsche Bank.
Stocks fell for the second day in a row and banks were hurt by a drop in bond yields, which means lower interest rates and smaller profits on loans.
Consumer companies, meanwhile, fell as home improvement retailers were affected by a slowdown in sales of new homes.
European banks tumbled after the German magazine Focus said Deutsche Bank will not get a government bailout if it asks for one. Its report, published on Friday, cited "government circles" as its source.
The Dow Jones industrial average lost 166.62 points, or 0.9%, to 18,094.83.
The Standard & Poor's 500 index fell 18.59 points, or 0.9%, to 2,146.10 while the Nasdaq composite dropped 48.26 points, or 0.8%, to 5,257.49.
Stocks are coming off two weeks of solid gains and the Nasdaq set all-time highs twice last week.
The article in Focus also said the German government will not help the Deutsche Bank by intervening with US officials who want it to pay $14bn to end an investigation into its sale of mortgage-backed securities.
The bank's US-listed shares tumbled 90 cents (69p), or 7.1%, to $11.85. The stock is down 51% this year.
Other banks also tumbled. Goldman Sachs took the largest loss among Dow stocks and sank $3.65, or 2.2%, to $161.48. Citigroup shed 1.26 (97p), or 2.7%, to $45.89.
Bond prices rose. The yield on the 10-year US Treasury note fell to 1.58% from 1.62%. That also affects banks as lower bond yields mean lower interest rates and smaller profits on lending.
Stocks overseas also weakened - the Dax in Germany dropped 2.2% and France's CAC 40 fell 1.8%. In Britain, the FTSE 100 was down 1.3% while Japan's benchmark Nikkei 225 edged down 1.3%.
Home Depot and Lowe's sank after the government said sales of new homes fell almost eight per cent in August. That followed a big jump the month before.
Home Depot shed 2.34 dollars (£1.80), or 1.8%, to $125.45 and Lowe's fell $1.54, or 2.1%, to $70.81.
Pfizer, one of the largest drug companies in the world, traded lower after it said it will not split into two smaller companies.
Some of its investors had supported that plan in the hope it would bolster the value of their stock and accelerate growth, but lately the Viagra maker has been signalling that it probably would not break up. Its stock fell 62 cents, or 1.8%, to $33.64.
Oil prices bounced higher as investors monitor a meeting of oil producers in Algeria.
Benchmark US crude rose $1.45, or 3.3%, to $45.93 a barrel in New York.
Brent crude, the international benchmark, rose $1.46, or 3.2%, to $47.35 a barrel in London.