U.S. stocks started the new year on the downside after economic reports on employment growth and construction spending on Monday raised fears of some weakness in the economy, but the dollar rallied.
The bounce in the dollar and a fall in oil prices hurt gold, which closed at a two-month low. Bond prices were mixed.
The Dow Jones industrial average closed down 53.58 points, or 0.50 percent, at 10,729.43. The Dow rose as high as 10,867.39 before the the Institute for Supply Management reported that its employment component fell to a 14-month low and the U.S. government reported that construction spending fell unexpectedly in November.
The ISM's employment number raised speculation that the closely watched report on U.S. non-farm payrolls data due on Friday would show fewer gains in employment than expected.
The Standard & Poor's 500 Index fell 9.84 points, or 0.81 percent, to end at 1,202.08. The Nasdaq Composite Index slid 23.29 points, or 1.07 percent, to finish at 2,152.15.
"The (stock) market has been pricing in fairly healthy economic growth and earnings for the next year," said Gordon Fowler, chief investment officer for the Glenmede Trust Company in Philadelphia. "We're in a situation where the market is vulnerable to any sort of negative news."
The Institute for Supply Management's U.S. manufacturing index for December climbed slightly higher than expected to 58.6 from 57.8 in November.
However, the gauge's employment component, favored by many analysts as a predictor of U.S. jobs growth, slipped to a 14-month low of 52.7 in December from 57.6 in November.
The closely watched U.S. non-farm payrolls data are expected to show a rise of 175,000 in December after November's 112,000 increase.
Construction spending fell unexpectedly by 0.4 percent in November as a cooling in residential construction offset a small rise in public spending, according to government data.
Shares of construction equipment makers fell, with Caterpillar Inc. off 2.5 percent at $95.07, and Cummins Inc. off 1.8 percent at $82.30.
A brokerage downgrade of network computer maker Sun Microsystems hurt technology shares. Sun Micro fell 5.2 percent to $5.11 after Sanford Bernstein cut its rating to "underperform."
Exxon Mobil Corp. fell 2.3 percent to $50.09, while ChevronTexaco Corp. slid 3 percent to $50.90.
Wal-Mart Stores Inc., the world's biggest retailer, rose 1 percent to $53.35 after it said sales rose 3 percent last month at U.S. stores open at least a year -- higher than its forecast a week ago -- due to a late surge in holiday shopping.
OIL FALLS, DOLLAR RALLIES, GOLD AT 2-MONTH LOW
U.S. crude oil and heating oil slumped on Monday as mild winter weather was expected to reduce heating oil demand.
NYMEX crude for February delivery settled at $42.12 a barrel, falling $1.33, or 3 percent.
NYMEX February heating oil settled at $1.1922 a gallon, a loss of 6.04 cents, or 4.8 percent.
The dollar rebounded on Monday after last week's heavy sell-off but analysts were uncertain if the rally would hold after the ISM's data on Monday suggested the December U.S. jobs report due Friday might not live up to market expectations.
Late in New York, the euro slipped to $1.3457, down 0.7 percent from $1.3558 late on Friday in New York.
Against the yen, the dollar rose about 0.3 percent to 102.71 yen. Against the Swiss franc, the dollar was up 0.9 percent at 1.1482 Swiss francs.
Sterling fell 0.7 percent to $1.9042