Optimism about a deal to prevent financial collapse in Cyprus had briefly pushed the Standard & Poor's 500 index to within a quarter-point of its record closing high, but stocks soon turned negative.
The S&P 500 and Nasdaq composite index both closed down 0.3 percent. The Dow Jones industrial average slipped 0.4 percent.
Stocks turned negative about an hour into the trading day Monday as the initial euphoria about Cyprus' deal to secure 10 billion euros in emergency funding was overshadowed by renewed concerns about the European economy.
The fear intensified after a top European official indicated that investors in struggling banks may be forced to take losses — an element of the Cyprus agreement that had previously been seen as unique to that country.
All ten industry groups in the S&P 500 closed lower, with industrial and materials companies posting the biggest losses. Network technology company VMware Inc. dove after the website Business Insider reported that PayPal and eBay will remove its software from 80,000 servers. The stock fell $3.65, or 4.6 percent, to $76.50.
Among the biggest drags on the S&P 500 index were software maker Red Hat Inc., online marketplace eBay Inc. and Textron Inc., an aerospace and defense contractor.
Europe still needs a long-term economic fix, said David Kelly, chief global strategist at J.P. Morgan Funds. Business activity in the 17 nations using the euro has declined continually since September 2011, according to research by Markit, a data provider. The region's economy shrank 0.6 percent in 2012, according official government statistics.
Business activity in nations that use the euro contracted more quickly in March, according to Markit's closely-watched survey of purchasing executives, which was published Thursday. The index had its worst decline in four months.
European policy makers have avoided a financial crisis by flooding the market with cash, but they haven't addressed economic hardship on the ground, Kelly said. In granting Cyprus' emergency rescue, for example, lenders demanded economic reforms, debt payments and a banking overhaul that will result in heavy losses for bank bondholders and shareholders. In addition, people with more than 100,000 euros in their accounts will lose up to 40 percent of their deposits.
Kelly said that's tough to swallow for people facing high unemployment and government cutbacks in Greece, Italy, Spain and other countries that received bailouts.
"If they're going to end up broke anyway," Kelly said, it will be "harder and harder for people to make the sacrifices that Europe is demanding of them." That could lead voters in bailed-out countries to resist lenders' terms, increasing political and economic instability in Europe and weighing on global markets, he said.
That concern intensified Monday after a key official indicated that the Cyprus rescue may serve as a model in other nations with struggling banks.
"If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders," said Jeroen Dijsselbloem, who chairs meetings of finance ministers from nations that use the euro, in an interview with the Financial Times and Reuters. Dijsselbloem's office confirmed the remarks.
Wall Street had opened higher, following gains in Europe and Asia. Traders were relieved that international lenders agreed early Monday to release emergency rescue funds for Cyprus. The European Central Bank will continue to support the nation's foundering banks. In exchange, Cyprus will take major steps to shrink its troubled banking industry and cut its budget.
At first, the deal to save Cyprus' banks erased the latest source of anxiety for investors, who have traded for more than three years under the cloud of a debt crisis in Europe. The fear is that a heavily indebted country will default on its financial obligations and be forced to exit the shared currency. That could cause the region to unravel, deepening the recession there and roiling international financial markets.
Concern about Cyprus last week pushed U.S. stock indexes to only their second weekly loss this year. Investors watched closely as the small, Mediterranean island scrambled to satisfy its lenders and prevent its banks from collapsing.
Traders expect more turbulence from Europe before the crisis has been resolved, said Anthony Conroy, head trader at ConvergEx Group, which provides technology to support big traders like investment advisers and hedge funds. Given the uncertainty, it's not surprising that stocks would veer between positive and negative, he said.
"When you have concern, you have volatility, and you're seeing volatility in here," Conroy said.
European stocks were up when Wall Street opened Monday, but turned lower shortly after Wall Street's gains evaporated. France's CAC-40 closed down 1.1 percent, London's FTSE 100 fell 0.2 percent and Germany's DAX lost 0.5 percent.
Earlier, Asian stocks closed mostly higher on optimism about the Cyprus deal.
The S&P 500 closed down 5.2 points at 1,551.69. The loss was offset in part by big jumps for Apollo Group Inc. and McGraw-Hill Cos. Computer maker Dell Inc. also supported the index as a bidding war broke out among investors who want to take the company private.
The Dow fell 64.28 points to 14,447.75. The Nasdaq dropped 9.7 to 3,235.30.
As the final week of trading this quarter kicks off, the indexes are holding onto most of the gains built during the long rally earlier this month. The Dow is up 10 percent, the S&P 500 nearly nine percent.
Conroy expects stocks to maintain their recent gains as short-term dips draw more traders into the market. Kelly agreed, noting that stocks typically decline in the last week of a strong quarter, as investors seek to lock in their gains.
Among the companies making big moves:
— Apollo Group soared after the for-profit education company said its quarterly net income exceeded Wall Street's expectations. The stock rose $1.21, or 7.1 percent, to $18.25.
— Dollar General's quarterly net income rose as the operator of discount stores attracted more customers and sold more goods. The stock rose $1.01, or 2 percent, to $51.08.
— Dell rose 37 cents, or 2.6 percent, to $14.51. The company received competing bids from activist investor Carl Icahn, who offered $15 per share for a majority stake; and buyout firm Blackstone Group, which proposed a deal worth $14.25 per share. Founder Michael Dell had been in talks to take the company private for about $13.65 per share.
— McGraw-Hill Cos. rose strongly after it said it will resume an accelerated share buyback program capped at $500 million. The media company will use cash generated by the recent sale of its education business. Its stock rose $1.66, or 3.4 percent, to $50.03.
Daniel Wagner can be reached at www.twitter.com/wagnerreports .