Stocks traded near session lows Thursday after ECB President Mario Draghi's comments dashed hopes that the central banks would raise its bond purchases of debt-ridden euro zone nations and as investors remained on edge ahead of the EU summit.
The S&P 500 and the Nasdaq also fell. The CBOE Volatility Index, widely considered the best gauge of fear in the market, traded near 30.
All 10 S&P sectors were in negative territory, led by financials and materials.
The European Central Bank's President Mario Draghi said he didn't signal more bond purchases last week in a press conference following an interest rate decision, implying that he has stepped back from the idea of aggressive bond buying from the ECB.
Adding to woes, Draghi said the euro zone's outlook "remains subject to high uncertainty and substantial downside risks."
“We were definitely caught off guard with how dramatically Mario Draghi walked back from what was clearly a statement in support of bond markets with respect to the ECB,” said Dan Greenhaus, chief global strategist at BTIG. “With so much focus on austerity, the structural reform element is arguably more important because no matter what happens, these economies and markets are going to suffer through a very difficult near term period—the question is how quickly and how effectively can you emerge from that period.”
The ECB slashed its main interest rate as the euro zone's worsening debt crisis outweighed the concern over persistently high inflation.
“We’re being held hostage by Europe—headlines can move us in a flash so people are not willing to go in until there's better clarity,” said Kenny Polcari, managing director at ICAP Equities. “Market is trying to still hope that there’s going to be a pathway to a credible solution at the EU summit. If there’s no headway and the optimism doesn’t work out, the market is going to punish us very quickly.”
He and Merkel are both due to hold bilateral meetings later with Spanish Prime Minister-elect Mariano Rajoy before they head to Brussels where EU leaders meet for dinner tonight and kick off the heavily-anticipated EU summit.
On the economic front, weekly claims for jobless benefits tumbled 23,000 to a seasonally-adjusted 381,000, according to the Labor Department, the lowest in almost nine months. Economists surveyed by Reuters had forecast claims slipping to 395,000.
Meanwhile, wholesale inventories rose 1.6 percent in October, posting its biggest gain in five months, according to the Commerce Department. Analysts had expected a gain of 0.3 percent, according to a Reuters poll.
And former MF Global chief John Corzine is slated to appear before a congressional panel. MF Global collapsed in late October after making huge bets on European sovereign debt. (CNBC.com is streaming this event live.)
McDonald's climbed to hit a new 52-week high after the fast-food giant posted a bigger-than-expected gain in November same-store sales, helped by big gains in Asia and Europe. Rival Yum Brands edged higher, also hitting a new 52-week high.
Ford pared sharp losses after the automaker reinstated a dividend of 5 cents a share, its first time in five years.