Wall Street ended a five-week winning steak on Friday as the threat of rising interest rates in China prompted investors to book profits and reassess bullish positions in equities.
Investors worried tighter credit in China would curb demand for commodities, driving down energy and natural resource stocks. The two sectors were the biggest drag on the S&P.
A string of global worries, including debt problems in Ireland, have prompted investors to reassess their positions or at least buy protective options so they can define their risk, said TD Ameritrade chief derivatives strategist Joe Kinahan in Chicago.
Reflecting the concerns, the CBOE Volatility Index (.VIX) jumped 10.6 percent to 20.61, the first time the index has closed above 20 since late October. The CBOE Nasdaq 100 Volatility Index (.VXN) also surged 16.4 percent to 22.55.
"Whenever you see volatility indexes rising like this, that indicates that people are searching for protection in the options market either in the indexes, exchange-traded funds or individual equities," Kinahan said.
The Dow Jones industrial average (.DJI) fell 90.52 points, or 0.80 percent, to end at 11,192.58. The Standard & Poor's 500 Index (.SPX) slid 14.33 points, or 1.18 percent, to 1,199.21. The Nasdaq Composite Index (.IXIC) dropped 37.31 points, or 1.46 percent, to 2,518.21.
The S&P 500 dipped below its 20-day moving average on Friday for the first time since September 1 but managed to close above it, in a sign that that level, currently just above 1,194, could provide strong technical support.
Stocks have stalled in recent sessions after a two-month rally that climaxed last week, when the Dow and Nasdaq hit levels not seen since the collapse of Lehman Brothers in September 2008.
For the week, the Dow and the S&P 500 each lost 2.2 percent and the Nasdaq fell 2.4 percent. The two sectors that did the worst were financial stocks (.GSPF), down 4 percent for the week, and information technology stocks (.GSPT), off 3.2 percent.
U.S. December crude oil futures fell 3.3 percent on Friday and copper was off nearly 3 percent. That weighed on cyclical stocks, with aluminum producer Alcoa Inc (AA.N), the Dow's second-largest percentage loser, slumping 2.3 percent to $13.49.
Among the Dow's other major decliners, Exxon Mobil Corp (XOM.N) was off 1.2 percent at $70.99, while heavy machinery maker Caterpillar Inc (CAT.N) was down 1.7 percent at $81.04. The S&P energy index(.GSPE) slid 1.4 percent, while the S&P materials index(.GSPM) lost 2.2 percent.
This is the second time the index shied away from the 1,228 area, and its chart could be drawing a bearish "double top" formation. After the last retreat from that level in April, the S&P 500 started a correction that took it down to its July lows.
The Shanghai Composite Index (.SSEC) tumbled 5.16 percent, notching its biggest percentage loss in over a year on the likelihood China's central bank was set to raise rates to tackle inflation, a move that could pressure future growth.
"The whole commodity complex is exceptionally weak after the overnight action in China, and we need to see how it all plays out," said Tom Samuels, managing partner at Palantir Capital Management in Houston. "This may be the first seed of doubt about the healing power of (quantitative easing)."
In the last hour of trading, options traders were busy making short-term hedges as the market declined. Put trading surged in the SPDR S&P 500 fund (SPY.P) weekly options that expired after the close, said Scott Fullman, director of derivatives investment strategy at WJB Capital Group, in New York.
Boeing Co (BA.N) was the Dow's top percentage loser, shedding 3.5 percent to $63.09 after Sanford C. Bernstein cut its rating on the stock to "market perform," citing more potential delays for its 787 Dreamliner.
Worries that Ireland may default on its debt as well as declines in commodity prices and an unexpectedly weak outlook from Cisco Systems Inc (CSCO.O) helped cloud the market's outlook, though some investors said the underlying trend is strong.
On the upside, Intel Corp (INTC.O) rose 1.5 percent to $21.53 after the chipmaker boosted its dividend.
Trading volume was about 8.12 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq, compared with the year-to-date daily average of 8.72 billion.
Nearly five stocks fell for every one that rose on the New York Stock Exchange, while on the Nasdaq, four stocks fell for every one that rose.