NEW YORK Stocks fell on Thursday but pared back sharp losses late in the session on talk of progress by European leaders in easing the region's debt crisis, while a Supreme Court ruling upholding a landmark healthcare law hit large health insurers.
Markets are especially skittish about any shift in expectations for the euro zone as European Union leaders met on the first day of a two-day summit in Brussels.
"This is a process that is just going to wind on and is going to bring us periodic bouts of volatility in our markets depending on the news flow," said Matt Kaufler, portfolio manager at Federated Investors in Rochester, New York.
Stocks began lower and losses accelerated after a divided U.S. Supreme Court backed the centerpiece of President Barack Obama's healthcare overhaul law.
The decision surprised many investors who see the law, which requires that most Americans obtain insurance by 2014 or face a penalty, as a hallmark of a business unfriendly administration.
Shares later pared losses, though major insurers such as Aetna Inc (AET.N), which face more regulation, ended lower. Other companies reliant on Medicaid, such as Wellcare Health Plans Inc (WCG.N) rose as their patient rolls are expected to increase.
The Morgan Stanley healthcare payor index .HMO added 0.6 percent. Aetna ended down 2.7 percent to $39.85; Wellcare jumped 8.8 percent to $53.98.
"Because it was such an unexpected result from the Supreme Court today you knew the market had to have at least a short-term violent reaction," said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.
"At the end of the day what does it really change for the performance to the end of the year - probably not much."
Shares of JPMorgan Chase & Co (JPM.N) dropped 2.5 percent to $35.88 after a New York Times report projecting that losses from a recent botched trade could reach $9 billion, more than four times the original estimate. A Reuters report estimated the losses between $4 billion to $6 billion.
U.S.-traded shares of Barclays (BCS.N) slumped 12.1 percent to $10.84 after Britain said it had brought in the fraud squad to investigate possible crimes over attempts to manipulate lending rates, a scandal that is expected to spread to other banks. Lloyds (LYG.N) fell 3.6 percent to $1.87 in New York.
As EU leaders began the two-day summit, finance officials were working on urgent measures to diminish financial market pressure on Spain and Italy, which may prove to be more difficult to bail out than smaller nations in the euro zone.
Recent statements from German Chancellor Angela Merkel have been at odds with those of other European leaders on how to deal with the crisis, underscoring the difficulties in reaching common ground.
The Dow Jones industrial average .DJI dropped 24.75 points, or 0.20 percent, to 12,602.26. The Standard & Poor's 500 Index .SPX shed 2.81 points, or 0.21 percent, to 1,329.04. The Nasdaq Composite Index .IXIC lost 25.83 points, or 0.90 percent, to 2,849.49.
Commenting on the market's late day bounce back, traders pointed to two block S&P e-mini contracts traded in the last half hour that may have helped to spike buying interest.
More than 28,000 S&P e-Mini futures contracts traded at 3:34 p.m. as the market jumped, the heaviest one minute of volume since the morning.
"They are thinking they might get something done in Europe - don't believe the hype. This has been a four, coming up on a five-year problem and I don't see it going away. " said Jason Weisberg, managing director at Seaport Securities Corp in New York.
Also weighing on the financial sector, Citi Investment Research posted a bearish note on several U.S. banks including Bank of America Corp (BAC.N) and Goldman Sachs (GS.N) as the slow economic recovery hurts trading.
Bank of America Corp (BAC.N) shares slipped 0.4 percent to $7.74, while Goldman Sachs (GS.N) edged up 0.2 percent to $93.49. The KBW bank index 0.4 percent.
After the close, Nike Inc (NKE.N) slumped 10 percent to $87.20 after the footwear maker posted a quarterly profit that missed Wall Street estimates.
Volume was modest with about 6.69 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, slightly below the daily average of 6.84 billion.
Advancing stocks outnumbered declining ones on the NYSE by 1,697 to 1,282, while on the Nasdaq, decliners beat advancers 1,537 to 955.
(Reporting by Chuck Mikolajczak, additional reporting by Rodrigo Campos; Editing by Kenneth Barry)