NEW YORK (Reuters) - Stocks fell on Monday as investors dealt with the one-two punch of worsening political upheaval in the euro zone and the possibility that China's economy may be softening more than previously thought.
The S&P 500 finished lower for the fourth day of five to close at its lowest level since February, adding fuel to worries of a coming market correction.
Economically sensitive shares, including banks and energy companies, paced the decline. Exxon Mobil Corp (XOM.N) lost 1.2 percent to $82.12. The NYSEArca oil index .XOI fell 1.8 percent.
State television in Greece reported the president of the fiscally beleaguered country will continue talks on forming a coalition government, although Socialist leader Evangelos Venizelos said on Monday he was not optimistic that a government could be formed.
"People are starting to lose patience - you saw what happened in Greece and some of the other regions around Europe, in terms of voters getting frustrated," said Ken Polcari, managing director at ICAP Equities in New York.
"Now we are in that in-between stage - 1,325 on the downside and 1,350 representing resistance - so we are stuck right there."
Banks were pressured by JPMorgan Chase & Co (JPM.N), which announced the exit of a top executive after suffering trading losses that could reach $3 billion or more. JPMorgan shares fell 3.2 percent to $35.79 after losing 9 percent on Friday. The KBW Bank Index .BKX dropped 2.6 percent.
Adding to the swirling political winds in Europe, German Chancellor Angela Merkel's Christian Democrats suffered a crushing defeat on Sunday, which could encourage the opposition to increase attacks on her austerity policies. Merkel said on Monday the defeat was a bitter setback, but would not alter her view on how to achieve growth.
Concerns about the depth of a slowdown in China have been troubling investors for several months. China's decision on Saturday to cut the amount of cash banks must hold as reserves, normally seen as a pro-growth move, suggested the country may be facing more significant hurdles.
The three major U.S. stock indexes pared losses after the European markets closed before selling reaccelerated near the end of trading, pushing the S&P 500 below an important support level at 1,340, which could trigger further selling.
The Dow Jones industrial average .DJI dropped 125.25 points, or 0.98 percent, to close at 12,695.35. The Standard & Poor's 500 Index .SPX lost 15.04 points, or 1.11 percent, to 1,338.35. The Nasdaq Composite Index .IXIC fell 31.24 points, or 1.06 percent, to 2,902.58.
Groupon Inc (GRPN.O) closed up 18.5 percent at $11.74 after surging more than 20 percent during the session in a short-covering rally as traders scrambled to close bearish bets ahead of the daily deal company's first-quarter results.
After the closing bell, Groupon's stock shot up 13.5 percent to $13.33 after the company posted its first quarterly profit.
Safe-haven currencies, including the dollar and the Japanese yen, rose, with the euro hitting a four-month low against the dollar. Oil fell sharply, with Brent crude falling to its lowest level in 3-1/2 months. <O/R>
In merger news, Avon Products Inc (AVP.N) said on Sunday it told Coty Inc COTY.UL that it would consider the smaller company's $10.7 billion takeover bid and it expected to respond within a week. Avon shares rose 3.8 percent to close at $20.96.
Yahoo Inc (YHOO.O) is replacing its CEO for the third time in as many years, and giving three board seats to a hedge fund led by Daniel Loeb, putting him in a strong position to influence strategy at the struggling Internet company. The stock advanced 2 percent to $15.50.
Volume was modest, with about 6.6 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, slightly below the daily average of 6.78 billion.
Declining stocks outnumbered advancing ones on the NYSE by a ratio of 2,557 to 472, while on the Nasdaq, 1,921 stocks fell against 614 that rose.
(Reporting by Chuck Mikolajczak; Editing by Jan Paschal)