The concern on Wall Street is that higher energy prices will hurt consumer spending, which accounts for more than two-thirds of the U.S. economy. That has put even more weight on economic reports set to be released in coming weeks.
Higher oil prices have also cut into manufacturing as businesses are forced to spend more money to make and transport goods. A measure of the U.S. manufacturing sector released at 10 a.m. Eastern time is expected to show contraction for the fifth straight month during June as businesses struggle with inflation and nervous consumers.
Wall Street economists surveyed by Thomson Financial/IFR predict that the Institute for Supply Management, a trade group of purchasing executives, will report that its manufacturing index fell to 48.7 in June from 49.6 in May. A reading above 50 indicates expansion, while a reading below 50 indicates contraction.
The Commerce Department is expected to report that construction activity fell 0.5 percent in May. The report, scheduled for release at 10 a.m. EDT, is expected to show that spending fell to an annual rate of $1.115 trillion, according to economists surveyed by Thomson/IFR.
Ahead of the opening bell, Dow Jones industrial average futures fell 112, or 0.89 percent, to 11,227. Standard & Poor's 500 index futures fell 13.40, or 1.05 percent, to 1,267.70, and Nasdaq 100 futures fell 25.75, or 1.22 percent, to 1,820.25.
On Monday, the major indexes finished the first half of the year sharply lower - with the Dow Jones industrials completing their worst first half since 1970. The Dow is down 14.44 percent so far this year, while the S&P has lost 12.83 percent and the Nasdaq has fallen 13.55 percent.
Bond prices were slightly higher Tuesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.95 percent from 3.98 percent late Monday. The dollar slipped versus other major currencies, while gold prices rose.
In corporate news, investors are waiting for June auto sales reports that could send shares of General Motors Corp. and Ford Motor Co. lower. The reports are expected to show a seventh straight monthly drop in sales, which would be some of the worst numbers since 1992.
Financial shares could come under pressure after commercial finance company CIT Group Inc. announced the sale of its home lending business to Lone Star Funds for $1.5 billion. Lone Star will also assume $4.4 billion of debt and other liabilities.
CIT also agreed to sell other assets to raise a total $1.8 billion in fresh capital. Global financial companies have been raising money to combat more than $300 billion of losses from mortgage-backed securities and other risky investments.
Overseas, Japan's Nikkei stock average fell 0.13 percent after Wall Street's tumble. In afternoon trading, Britain's FTSE 100 fell 2.66 percent, Germany's DAX index fell 2.24 percent, and France's CAC-40 fell 2.63 percent.
