The index, the benchmark for most U.S. stock funds, has fallen 19.4 percent since its high for the year on April 29. A 20 percent drop would signify the start of a bear market, ending a bull market that began in March 2009. The S&P 500 has gained 76 percent since then, including dividends.
European markets slumped, dragging U.S. stocks down along with them, after Greece said it will miss deficit reduction targets it agreed to as part of its bailout deal. Benchmark indexes in Germany, France and Spain all fell 2 percent.
The Dow Jones industrial average fell 258.08 points, or 2.4 percent, to 10,655.30. The S&P 500 lost 32.19, or 2.9 percent, to 1,099.23. That's below its closing low of 1,119 for the year, reached on Aug. 8.
Indexes measuring smaller stocks fell even more than the Dow and S&P, which are dominated by large companies. The Nasdaq composite slid 79.57, or 3.3 percent, to 2,335.83. The Russell 2000 index of small companies plunged 5.4 percent to 609.49.
All 10 company groups in the S&P index fell. Banks, energy, and consumer discretionary stocks had the steepest declines. The yield on the 10-year Treasury note fell to 1.75 percent from 1.91 percent late Friday as investors piled into lower-risk investments. The yield hit a record low of 1.71 percent on Sept. 22.
"The market is continuing to trade based on what is happening in Europe, and that is going to overshadow everything else," said Quincy Krosby, market strategist at Prudential Financial. "The math (for the Greek bailout) didn't add up a year ago, and the math doesn't add up today. The market knows that and is waiting for the Europeans to acknowledge it."
The renewed concerns about Europe's debt problems pushed the euro down to $1.32 versus the dollar, a 9-month low. The stronger dollar could hurt large U.S. companies that rely on exports by making their products more expensive overseas. Coca-Cola Co. fell 3.2 percent to $65.42. Caterpillar Inc., which sells construction equipment globally, lost 4.5 percent to $70.55. Boeing, another large exporter, dropped 3.7 percent to $58.25.
"Everything that is coming out of Greece suggests that the dollar is only going to strengthen, which doesn't bode well for the international firms," said J.J. Kinahan, chief options strategist at T.D. Ameritrade. "It's tough to be bullish on anything at the moment."
The Dow briefly turned higher after 10 a.m., when the Institute of Supply Management said its gauge of U.S. manufacturing did better than Wall Street had predicted in September. The Dow and S&P turned mixed within 20 minutes, then took a sharp slide shortly after noon.
The slump started the market off on a weak note for the fourth quarter. Concerns that the U.S. economy is headed for another recession helped send the S&P 500 index, the basis for most mutual funds that invest in U.S. stocks, down 14 percent over the three months that ended in September. It was the worst quarter for the stock market since the financial crisis of 2008.
Some investors are also concerned that Friday's jobs report will show that unemployment rose from 9.1 percent in September. "If I had to bet, I would say it's more likely that more jobs have been lost than a surprise to the upside," said T.D. Ameritrade's Kinahan.
In corporate news, AMR Corp., the parent company of American Airlines, plummeted 33 percent to $1.98 as concerns flared up again that the company could be headed for bankruptcy protection. The stock hadn't closed below $2 since 2003. American is considered the most vulnerable among U.S. carriers to an economic downturn.
Bank of America Corp. plunged 9.6 percent to $5.53, the lowest price for the stock since the financial crisis in 2008. The company has fallen 59 percent since January as investors fret that the nation's largest bank will be hit with more settlements over mortgage securities that lost value after the housing bust.
Yahoo Inc. gained 2.7 percent, to $13.53, after the head of Chinese Internet company Alibaba Group Holdings said he would be interested in buying the company. Yahoo, which recently ousted Carol Bartz as its CEO, has been trying to decide whether to sell parts of the company.
Nine stocks fell for every one that rose on the New York Stock Exchange. Volume was heavy at 5.8 billion shares.
