NEW YORK Wall Street fell more than 1 percent on Monday as sovereign debt fears on both sides of the Atlantic and China's monetary tightening hurt the outlook for global economic growth.
However, equities ended off their lows as some analysts said the sell-off was overdone, though the decline was still the largest in a month.
Standard & Poor's revised its outlook on the United States credit rating downward to "negative" on a poor U.S. budget outlook, while China took additional measures to curb liquidity.
Meanwhile, financial markets are increasingly convinced that Greece will have to renegotiate the terms of its public debt, though Greek officials denied that some form of rescheduling was imminent.
Four stocks fell for every one that rose on both the New York Stock Exchange and the Nasdaq. In comparison, the reactions of the U.S. Treasury bond and dollar markets were more subdued.
"The behavior of the bond market suggests that we could get a rebound in stocks, at least one related to the S&P news," said David Joy, chief market strategist at Columbia Management in Boston, which oversees $347 billion.
The CBOE Volatility Index .VIX rose 10.7 percent after earlier climbing as much as 24.5 percent, its largest daily percentage jump since February 22.
"We're a little surprised that the VIX is as low as it is, since market risks have risen and there's been some complacency," Joy said, adding that Columbia Management had taken some short-term exposure off the table.
The Dow Jones industrial average .DJI slid 140.24 points, or 1.14 percent, to 12,201.59. The Standard & Poor's 500 Index .SPX declined 14.54 points, or 1.10 percent, to 1,305.14. The Nasdaq Composite Index .IXIC dropped 29.27 points, or 1.06 percent, to 2,735.38.
The S&P 500 index fell below 1,300 for the first time since March 24, though it later rebounded above that level. Short-term support is seen near the 1,285 area.
Volume was low, with about 7.83 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's daily average of 8.47 billion.
As investors move to companies expected to outperform in uncertain economic times, the defensive S&P 500 sectors like utilities .GSPU and consumer staples .GSPS posted among the smallest losses in Monday's slide.
Citigroup Inc (C.N) was unchanged, closing at $4.42, after it reported a first-quarter profit that was slightly higher than expected, while Eli Lilly & Co (LLY.N) fell 1.1 percent to $35.62 on concerns about looming generic drugs competition.
Mitch Rubin, chief investment officer of RiverPark Advisors in New York, said the day's earnings suggested volatility in the near term.
"Market movement will be driven by earnings, and we've seen a lot of mixed results," Rubin said. "There's been disappointment about bank results."
China raised banks' required reserves on Sunday for the fourth time this year, extending the fight against excessive liquidity and stubbornly high inflation in the world's second-largest economy.
Caterpillar Inc (CAT.N), hurt both by expectations of ballooning funding costs and China's move to harness liquidity, slid 3.1 percent to $103.90.
China's move and the downward revision of the U.S. credit outlook hurt basic materials and crude prices, sending the Reuters/Jefferies CRB index of commodities .CRB down 0.9 percent.
Dow component Exxon Mobil Corp (XOM.N) dropped 1.4 percent to $83.10 while fellow blue-chip Alcoa Inc (AA.N) fell 2.3 percent to $16.14.
(Reporting by Ryan Vlastelica; Editing by Jan Paschal)