Stocks were under pressure across the board, with the S&P 500 pulling further away from its all-time high, as global markets reeled from a euro zone decision to force bank depositors in Cyprus to contribute towards a bailout.
The Dow Jones Industrial Average initially dropped more than 100 points at the open before recovering some of its losses. JPMorgan and Bank of America led the blue-chip laggards.
The S&P 500 and the Nasdaq were also in negative territory. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, spiked more than 15 percent to trade above 13.
All key S&P sectors traded in negative territory, led by financials and materials.
Stocks finished in negative territory last Friday, with the Dow snapping a 10-day win streak, its longest since 1996. The S&P 500 ending shy of its record closing level.
On the economic front, the homebuilder sentiment index declined to 44 in March from 46 in the month prior, according to the National Association of Home Builders, falling to the lowest level in five months. Economists polled by Reuters expected a gain to 47. A reading below 50 indicates more builders view market conditions as poor than favorable.
Shares of homebuilders including Ryland and Beazer fell following the report.
European and Asia shares fell sharply on the Cyprus bailout news, with banks particularly affected as investors fear the move could hurt other peripheral nations, the euro and the global stock market rally.
(Read More:Cyprus Slams Brakes on Risk-On)
"The news is a wake-up call to investors that the European sovereign debt issue is far from being resolved," Doug Kass of Seabreeze Partners wrote in a note.
With Cyprus banks closed on Monday and investors draining cash machines over the weekend, the government is reportedly looking to change the levy to lessen its blow on smaller savers.
According to sources cited by the Dow Jones news agency, the proposal would see savers with less than 100,000 euros in Cypriot accounts pay a one-time tax of 3 percent. Those with deposits from 100,000 to 500,000 euros would pay 10 percent and anyone with over 500,000 euros in their accounts would pay 15 percent. Up to 40 percent of deposits in Cypriot banks are owned by foreigners.
The euro plunged to a three-month low against the U.S. greenback and a roughly two-week trough versus the yen.
(Read More: What You Need to Know About Cyprus: El-Erian)
All major banks were sharply lower across the board, including Credit Suisse and Morgan Stanley.
The Federal Reserve is scheduled to hold a two-day meeting later this week and investors will be watching for any signs that the central bank could start winding down its quantitative easing program. The Fed's meeting will culminate with the release of its policy statement, economic forecasts and a press briefing by Fed Chairman Ben Bernanke on Wednesday afternoon.
(Read More: Super Wednesday for World's Central Banks)
Schlumberger tumbled after the oilfield services company warned that North American activity was coming in lower than expected in the first quarter, as fewer rigs were going back to work than it had expected.
Verizon was upgraded to "buy" from "neutral" at Citigroup, which now sees the telecommunications firm executing a buyout of Vodafone's stake in Verizon Wireless that provides tax efficiency for Vodafone and earnings accretion for Verizon.
Hewlett-Packard edged higher after Morgan Stanley upgraded the tech firm to "overweight" from "equal weight," citing positive momentum in both free cash flow and earnings, which will accelerate the timing of cash being returned to investors.
?By CNBC's JeeYeon Park (Follow JeeYeon on Twitter:@JeeYeonParkCNBC)
? 2013 CNBC LLC. All Rights Reserved
Source: http://www.nbcnews.com/business/wall-street-slumps-cyprus-bailout-news-1C8912547
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