Most blue-chip components sank, led by Caterpillar and DuPont.
The S&P 500 fell 15.90 points, or 1.19 percent, to close at 1,317.37, while the tech-heavy Nasdaq fell 44.42 points, or 1.6 percent, to close at 2,758.90. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose to nearly 18.
All key S&P 500 sectors fell, led by technology, energy and industrials.
The catalyst for Monday's selloff was news that euro zone debt troubles were getting worse. But investors in the U.S. were also focused on the rise in the dollar and the slide in commodities, ranging from crude oil and precious metals to industrial commodities like cotton, lumber and copper, said James Paulsen, chief investment strategist at Wells Capital Management.
Paulsen has his eye mainly on industrial commodities, and says if "they find a bottom, then you'll see the stock market find a bid again." For that to happen, he added, economic reports in the U.S. will need to turn brighter. The fact initial jobless claims came down last week was a good sign that will need to be repeated this week.
But if the economic reports continue to be bad, then "we’ll be down below 1300," he said, referring to the level of the S&P 500 index.
Monday's market action pushed stocks through some key technical levels. The S&P 500, for instance, traded below 1,320, which was the low on the index last week, noted Andrew Burkly, director of equity strategy research at Brown Brothers Harriman.
"The next significant support level is 1295, that would be the next battle ground," Burkly said. He added that he expects the market to fall through that level to 1,230, his low estimate for the year. For the rest of 2011, Burkly expects the market to remain choppy, and the S&P 500 not to get much higher than 1,350.
But some analysts are more optimistic.
"It's like listening to a pilot say, 'We're approaching turbulence, please put on your safety belt,' Stovall said. "She is not saying, 'Don your parachutes and assemble by the door.'"
Much of Monday's market weakness stemmed from troubles in Europe, which began over the weekend with Standard & Poor’s downgrade of Italy's outlook to "negative" from "stable." Then Spain's ruling Socialist party suffered an election setback.
On Monday, European purchasing managers index data indicated a slowdown in growth in the euro zone, with German and French numbers below expectations. Also, Fitch lowered Belgium's rating outlook to "negative" from "stable."
Also in Europe, several leaders called for Greece to avoid debt restructuring and push ahead with austerity measures.
The euro zone troubles also pushed the euro to a two-month low against the dollar. The dollar index rose more than 1 percent against a basket of currencies. Meanwhile, gold rose 0.4 percent to close at $1,515.30 an ounce, gaining support as a safe alternative, while silver fell 0.5 percent to $34.90.
Elsewhere in stocks, Boeing and General Dynamics fell despite news the U.S. Supreme Court vacated a lower court ruling against the firms. The case stems from the Navy's cancellation of a $4.8 billion fighter jet.
Sony fell after changing its earnings estimate for the year to a net loss from a profit, a sign the company suffered a financial setback from the multiple disasters that hit Japan in March.
Campbell Soup declined despite beating profit expectations and after S&P Equity raised its rating on the stock to "hold" from "sell." The research firm also raised its price target for the stock to $36 a share from $31.
LinkedIn slumped a day before restrictions are removed to allow traders to short shares of the professional networking site, a strategy that involves betting that a stock's price will fall. Only 10 percent of LinkedIn's shares are public, however, which will make it difficult to execute the strategy.
Mosaic was among the few stocks higher on Monday after JPMorgan raised its rating on the fertilizer maker to "overweight" from "neutral," citing valuation, and Stifel Nicolaus raised its rating to "buy" from "hold." Rival fertilizer companies also gained, including Potash, CF Industries, and Agrium.
In initial public offering news, Yandex, a Russian Internet company, is expected to price its offering after the market closes. The price has reportedly been raised to $24 to 25 a share.
European markets closed lower on worries over the debt situations of euro zone countries.