A weak report on housing starts made investors nervous that the economy will be slower to recover even as profits at many companies exceed expectations.
Stocks fell from the 2009 highs reached a day earlier after the Commerce Department said home building rose less than expected in September, a discouraging signal for future construction activity.
The market will get another measure of the housing market's health on Friday with a report on existing home sales. After several months of encouraging data on housing, investors have become disappointed in recent weeks with signs that a recover in home building and home sales is starting to falter, which could bode poorly for the prospects of the broader economy.
A rebound in the dollar from a 14-month low against other major currencies also hurt stocks by driving down commodity prices and, in turn, hurting energy and materials companies.
The housing data and the stronger dollar overshadowed strong earnings reports from Apple Inc., Caterpillar Inc., health insurer UnitedHealth Group Inc. and drug maker Pfizer Inc.
There was more trouble for stocks from a Labor Department report finding that energy prices pushed U.S. wholesale prices lower in September, leaving a larger-than-expected monthly drop in the producer price index. That report helped lift the bond market, however, which tends to rise on signs of muted inflation and slow economic growth.
Shaeffer's Investment Research analyst Todd Salamone said the market's ability to avoid a big slide is an encouraging sign.
"We've got a report that's disappointing and the bears haven't really gained control here," he said. "It's a good excuse just to take a breather."
In early afternoon trading, the Dow Jones industrial average fell 81.62, or 0.8 percent, to 10,010.57.
The broader Standard & Poor's 500 index fell 9.84, or 0.9 percent, to 1,088.07, and the Nasdaq composite index fell 21.08, or 1 percent, to 2,155.24.
Treasury prices rose, pushing their yields lower, after the drop in producer prices. Inflation is a worry for bond investors because rising prices can eat into returns. The yield on the 10-year Treasury note fell to 3.35 percent from 3.39 percent late Monday.
The dollar and gold rose. Crude oil fell $1.03 to $78.58 a barrel on the New York Mercantile Exchange.
Apple reported much stronger profits after the markets closed on Monday, citing big gains in sales of iPhones and Mac computers. Texas Instruments' results came in above the improved forecast the chip maker issued last month.
Apple rose $8.74, or 4.6 percent, to $198.60, while Texas Instruments advanced 30 cents, or 1.3 percent, to $23.82.
Caterpillar Inc. rose $1.49, or 2.6 percent, to $59.34, while UnitedHealth Group jumped $1.02, or 4.1 percent, to $25.94. Pfizer rose 3 cents, or 0.2 percent, to $18.01.
More than two stocks fell for every one that rose on the
New York Stock Exchange, where volume came to 633.9 million shares compared with 515 million shares traded at the same point Monday.
The Russell 2000 index of smaller companies fell 10.95, or 1.8 percent, to 611.39.
Overseas, Japan's Nikkei stock average rose 1 percent. Britain's FTSE 100 fell 0.7 percent, Germany's DAX index lost 0.7 percent and France's CAC-40 fell 0.5 percent.
