The Dow Jones industrial average (INDU) sank 95 points, or 0.7%, to end at 12,385. The S&P 500 (SPX) fell 11 points, or 0.8%, to 1,305. The Nasdaq Composite (COMP) slid 25 points, or 0.8%, to 2,765.
U.S. stocks took their cues from Europe after results from the latest bank stress tests fanned concerns about the challenges facing the European Union as it struggles to resolve the debt crisis in Greece.
In Washington, policy makers made little progress over the weekend on a budget deal to raise the nation's debt ceiling.
Early Monday, rating agency Moody's went so far as to suggest the debt ceiling itself should be eliminated to bring greater stability and avoid "periodic uncertainty."
"The debt worries both here and abroad continue to weigh on the markets," said Peter Cardillo, chief market economist for Avalon Partners. "There is just too much uncertainty."
That uncertainty drove investors to gold, which ended at a record high of $1,602.40 an ounce. Investors see gold as the best place to park their money when there's economic or political uncertainty.
Silver prices also moved higher, rising above $40 an ounce for the first time since early May.
The U.S. dollar gained versus the euro and oil prices fell more than 2%.
The global debt concerns were overshadowing corporate reports, which have been generally better than expected, said Kate Warne, chief investment strategist with Edward Jones.
"I do think investors have been overlooking the solid performance of companies and paying far more attention to the headlines about governments having problems paying their bills," she said.
Analysts at Capital IQ expect second-quarter earnings for the companies in the S&P 500 to be up 15% versus the same period last year.
Of the 43 companies in the index that have reported earnings so far, 30 have come in better than expected, according to Capital IQ.
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