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Stocks were mired in the red on Monday, extending sharp losses from the previous week, weighed by the debt ceiling and budget wrangling in Washington.
The Dow Jones Industrial Average slid, dragged by JPMorgan and Bank of America, and was 48 points lower in afternoon trading.
Visa, Goldman Sachs and Nike officially joined the Dow Jones Industrial Average, replacing Alcoa, Hewlett-Packard and Bank of America.
The S&P 500 and the Nasdaq also declined. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, spiked above 14.
Most key S&P sectors were in the red, dragged by financials, while techs held modest gains.
Budget talks will continue this week with the aim of passing a resolution to fund government beyond October 1. On Friday, Republicans passed a bill that would fund the government until December 15, but would defund Obamacare.
Daiwa Capital Market's Michael Moran warned that acrimonious debate could shake consumers and businesses' resurgent confidence and lead to a reduction in spending plans.
"This seemed to occur in 2011, when GDP in Q3 advanced only 1.4 percent in the wake of the heated debate over the debt ceiling? Discord could easily arise in the upcoming debate, as some legislators are attempting to use the new legislation to defund the Affordable Care Act, obviously a sensitive issue and a risky strategy," he said in a report.
Meanwhile, New York Fed President William Dudley said the central bank still needs to push hard against threats to the U.S. economic recovery, and fiscal uncertainties in particular "loom very large right now." Dudley defended the Fed's decision last week not to trim its aggressive bond-buying, arguing in a speech that any changes to the quantitative easing program mush be based on the most recent measures of economic health.
(Read more: Pros share best bond plays regardless of taper)
Apple shares rose over 3 percent higher after the tech giant announced that sales for its new iPhone had set a record, with consumers snapping up a record 9 million smartphones within the first few days of its launch. In addition, the company said there were more than 200 million downloads of its new iOS 7 platform.
Meanwhile, Microsoft introduced its next generation Surface tablet at an event in New York City. The new Surface Pro 2 is lighter and thinner and features 75 percent longer battery life and is 95 percent faster than all laptops on the market, the company said.
In Europe, shares traded narrowly lower on Monday, with the exception of the French stocks, which were boosted after flash composite PMI (purchasing managers' index) data for September came in above 50 for the first time in 19 months. A reading above 50 indicates economic expansion.
(Read More: French, German private sectors power ahead)
In Asia, shares were mixed as investors digested better-than-expected Chinese factory activity data. However, trading volumes were thin, with Japanese markets shut for a public holiday.
HSBC's flash manufacturing PMI of small and medium-sized firms in China hit a six-month high of 51.2 in September, higher than August's reading of 50.1, thanks to stronger domestic and foreign demand.
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