"It's not like all of our problems went away because the market was up a couple of days last week. There are still some problems hanging over," said Tom Higgins, chief economist at Payden & Rygel Investment Management in Los Angeles. He said investors chiefly remained concerned about the labor market - given the huge effect of consumer spending on the economy - and on the feasibility of efforts to aid struggling bond insurers.
The session's move lower continued even after a Commerce Department report showed that orders at U.S. factories rose by 2.3 percent in December - the biggest increase since July. Analysts had been expecting a 2 percent increase after a 1.7 percent gain in November.
While stocks showed little reaction to the factory orders report, Wall Street remains eager for any clues about the nation's economic health. It continued to watch earnings reports trickle in; the readings could help indicate whether Wall Street last week carved the beginnings of a sustainable recovery. Last week, the Dow Jones industrial average jumped 4.39 percent, the Standard & Poor's 500 index gained 3.75 percent, and the Nasdaq composite index advanced 4.87 percent.
Downgrades of credit card companies American Express Co. and Capital One Financial Corp. also weighed on stocks Monday.
The Dow fell 108.03, or 0.85 percent, to 12,635.16.
Broader stock indicators also lost ground. The S&P 500 index fell 14.60, or 1.05 percent, to 1,380.82, and the Nasdaq fell 30.51, or 1.26 percent, to 2,382.85.
The Dow is 10.8 percent below its record close of 14,164.53 from Oct. 9, but is up 8.6 percent from the 15-month lows it hit in January. The Federal Reserve's second interest-rate cut in about a week helped boost stocks last week.
Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.64 percent from 3.60 percent late Friday.
The dollar slipped against most other major currencies, and gold prices also fell.
Light, sweet crude oil rose rose $1.06 to settle at $90.02 a barrel on the New York Mercantile Exchange.
In corporate news, Google Inc. said Sunday that Microsoft Corp.'s $42 billion bid for Yahoo Inc., announced Friday, amounts to an attempt to gain illegal control over the Internet. Microsoft Chief Executive Steve Ballmer said Monday the proposed deal would leave the software maker as a "strong No. 2 competitor" against Google.
Google, whose stock is down about one-third from its high of $741.79 on Nov. 6, fell $20.47, or 4 percent, to $495.43, Dow component Microsoft dipped 26 cents to $30.19, and Yahoo rose 95 cents, or 3.4 percent, to $29.33.
Financial stocks, which helped drive last week's gains, fell after the Financial Times reported that major private equity firms aren't likely to take part in efforts to shore up the finances of troubled bond insurers Ambac Financial Group Inc. and MBIA Inc.
Ambac fell $1.81, or 13.7 percent, to $11.39, while MBIA declined 97 cents, or 5.9 percent, to $15.39.
American Express, one of the 30 stocks that make up the Dow industrials, fell $1.94, or 3.9 percent, to $47.66, while Capital One fell $4.32, or 7.6 percent, to $52.65.
"We have some downgrades in the financial sector that are hitting those stocks," said Peter Cardillo, chief market economist at Avalon Partners. "And we also had a fairly good week last week, so it would only be natural to fall this week."
"The market also needs closure on what is going to happen to the bond insurance industry. Until we know if it gets a rescue plan, the stock market is likely to stay defensive."
Wendy's International Inc. fell $1.25, or 5 percent, to $23.93 after reporting its fourth-quarter earnings rose 42 percent amid increased profit margins but missed expectations.
Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange. Consolidated volume came to 3.38 billion shares Monday, down from 4.51 billion shares Friday.
The Russell 2000 index of smaller companies fell 7.04, or 0.96 percent, to 723.46.
Overseas, Japan's Nikkei stock average rose 2.69 percent, Hong Kong's Hang Seng index climbed 3.77 percent, and China's benchmark but often-volatile Shanghai Composite index jumped 8.13 percent after reports indicated the economic effects from harsh winter storms in China might not have been as bad as feared.
Britain's FTSE 100 fell 0.05 percent, Germany's DAX index rose 0.46 percent, and France's CAC-40 fell 0.09 percent.
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