Stocks ended modestly lower amid further signs of economic weakness, and despite a positive call on commodities by Goldman Sachs, which lifted prices of oil and metals.
The Dow Jones Industrial Average fell 25.05 points, or 0.2 percent to close at 12,356.21 after fluctuating throughout the session. The blue chip average started the week out shaky, falling about 130 points after a weekend downgrade of Italy's outlook and concerns over Greek debt restructuring.
The S&P 500 fell 1.09 points, or 0.08 percent, to close at 1,316.28, while the Nasdaq fell 12.74 points, or 0.5 percent to close at 2,746.16. The CBOE Volatility Index, widely considered the best gauge of fear in the market, fell to below 18.
Among key S&P sectors, financials and industrials slipped, while energy gained.
"There is currently a tug of war going on in the market, with some investors worried about a continued slowdown in the economy during the second half of 2011," said Michael Sheldon, chief market strategist at RDM Financial Group. "On the other hand, other investors continue to stick to their guns and invest based on continued growth in the global economy in the quarters ahead."
Those worried about a slowdown probably focused Tuesday on a report by the Richmond Federal Reserve showing a decline in manufacturing activity in May. The Richmond Fed index fell to a negative 6 after a reading of 10 in April, as shipments and new orders declined.
"When you combine this report with the Philadelphia Fed and New York Fed manufacturing reports, the odds are stacking up that we’re going to see some softening in the national ISM report that comes out on June 1," Sheldon said.
The market is also struggling with what will happen when the Federal Reserve stops purchasing long-term bonds, a program known as quantitative easing, at the end of June, said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.
"The markets are backing off in part because they are concerned whether assets will move higher in the absence of Fed buying," McCain said. "If equity prices correct enough, we may find that once we get past June we see a renewed enthusiasm over the next month or so."
Investors also have an eye on debt troubles in peripheral euro zone countries. All these factors combine are leading some analysts to expect stocks to continue tumbling.
"If you think of the marriage of European events and the end of the Fed (easing) and summer illiquidity, you have the perfect setup for a correction," said Jordan Kotick, global head of technical strategy at Barclays Capital.
Oil prices gained after Goldman Sachs said demand for crude would rise, although prices moved higher and lower based on the level of the dollar against a basket of currencies. U.S. light, sweet crude rose nearly 2 percent to $99.59 a barrel, while in London, Brent crude rose 2.2 percent to $112.53.
Goldman said Brent would rise to $130 a barrel in 12 months and also said it expected copper and zinc to rise. Morgan Stanley on Tuesday also raised its forecast for Brent crude prices for this year and next.
Meanwhile, demand for U.S. retail gasoline fell 2 percent in the week ended May 20 from the same period a year ago amid still high prices, MasterCard Advisors' SpendingPulse said.
Precious metals prices rose on Tuesday. Gold gained 0.52 percent to close at $1,523.20 an ounce, while silver rose 3.5 percent to close at $36.12 an ounce.
El Paso soared after news the energy firm would split into two companies, one focusing on exploration and production and a second on the pipeline business. The company also raised its earnings outlook for the year.
Russian internet search firm Yandex launched a $1.3 billion initial public offering on the Nasdaq Tuesday. Shares began trading at $61 a share, and then fell back to about $35 a share, still above the offering price of $25 a share.
The IPO comes just days after LinkedIn received an explosion of interest in its offering. Shares of the social networking firm for professionals, meanwhile, gained on Tuesday despite being the first day traders were allowed to short the stock, which would be a bet that the stock price would fall.
Several less high profile IPOs are expected this week. Among them are Freescale Semiconductor Holdings, which will offer 43.5 billion shares at $22 to $24 a share and Lone Pine Resources, which will offer 15 million shares at $18 to $20 a share on Wednesday. On Thursday, Solazyme will offer 10 million shares at $15 to $17 a share.
The financial sector fell as American International Group got set to price a 300 million share secondary offering after the market closed. AIG fell ahead of pricing, which is expected to raise about $9 billion. The U.S. Treasury will be selling 200 million shares of its 92 percent stake in AIG, while AIG is selling the rest.
The Federal Deposit Insurance Corp. reported thatthe number of banks at risk of failing grew in the first quarter, although the FDIC reported only four banks were added to its confidential "problem" list.
Deere gained slightly after raising its quarterly dividend by 17 percent to 41 cents a share from 35 cents. The move comes after the maker of construction, mining and farm equipment released strong second quarter earnings and an upbeat forecast.
Sony gained after news its operating profits would be the same as last year's despite the devastating earthquake and tsunami in Japan in March.
Volume onthe consolidated tape of the New York Stock Exchange was 3.4 billion shares, while 868 million changed hands on the NYSE floor.
Bonds rallied slightly after Treasury auctioned $35 billion in two-year notes to yield 0.56 percent at a bid-to-cover ratio of 3.46.
On the economic front, new home sales rose 7.3 percent in April to a seasonally adjusted annual rate of 323,000, from a 8.3 percent gain in March, the Commerce Department report. Economists surveyed by Reuters had expected new home sales to be be unchanged at the previously reported annual rate of 300,000 units.
Despite all the euro zone debt concerns, European shares ended modestly higher, led by mining companies.