The Dow Jones industrial average was down 18.73 points, or 0.17 percent, to end at 11,125.33. The Standard & Poor's 500 Index was down 4.96 points, or 0.39 percent, to finish at 1,262.07. The Nasdaq Composite Index was down 21.02 points, or 0.96 percent, to close at 2,172.86.
Investors also bailed out of risky assets such as U.S.- traded emerging-market shares in favor of safe-haven assets like short-duration Treasury debt as the outlook for interest rates grew more uncertain.
"With a pickup in volatility, concern about inflation and questions about the next Fed move, people are very comfortable holding cash and some might be tempted to put money back to work in Treasuries, but there's still a bias to holding cash," said Joseph Quinlan, chief market strategist at Banc of America Capital Management.
Investors worried that rising prices would force the Federal Reserve to extend its two-year-old policy of rate increases, a move they fear would stall earnings growth.
Richard Fisher, the president of the Federal Reserve Bank of Dallas, Monday said that U.S. inflation is running too high for comfort, adding that the Fed has until the end of June to assess the impact on monetary policy.
Late in the afternoon, the 10-year U.S. Treasury note rose 7/32 to a price of 100-21/32, while its yield dipped to 5.04 percent from 5.06 percent on Friday. Earlier on Monday, the 10-year note's yield slipped below 5 percent as investors bought bonds in a flight to safety.
Adding to the Nasdaq's decline were concerns about options grant timing, said Edward Keon, chief investment strategist at Prudential Equity Group.
"Nasdaq companies have always been more aggressive in granting options and it looks like based on early reports, there may be more than just one or two that will be investigated," Keon said.
Microchip equipment maker KLA-Tencor Corp. (KLAC) was served on Monday with a subpoena by federal prosecutors seeking information on the grant of options.
KLA Tencor shares sank 10.4 percent, or $4.70, to $40.54 on Nasdaq.
Alcoa fell 2.6 percent, or 83 cents, to $31.15 on the New York Stock Exchange, making it the biggest drag on the Dow. Shares of 3M Co. slid 0.7 percent, or 58 cents, to $83.73.
Investors also fled emerging markets as too risky, sending stocks and currencies in those countries tumbling. Overseas shares traded on the NYSE were some of the Big Board's largest percentage losers. Sinopec Shanghai Petroleum dropped 15.5 percent, or $8.70, to $47.50, while India's Tata Motors Ltd. sank 8 percent, or $1.46, to $16.74.
Blue-chip stocks trimmed earlier losses as oil futures recovered from a sell-off to settle higher, pushing up heavily weighted energy shares like Exxon Mobil Corp. (XOM)
NYMEX June crude rose 70 cents to settle at $69.23 a barrel after falling to a six-week low earlier.
Exxon shares rose 0.6 percent, or 33 cents, to $60.78, and helped limit the declines in both the Dow and the S&P 500.
The NYSE Group Inc. Monday unveiled an 8-billion-euro bid ($10.2 billion) for Euronext , the operator of the Paris, Amsterdam, Brussels and Lisbon bourses.
NYSE shares fell 2.6 percent, or $1.65, to $62.85, while shares of rival Nasdaq Stock Market Inc. slumped 5 percent, or $1.65, to $31.40.
On the earnings front, shares of home improvement retailer Lowe's Cos. (LOW) Inc. fell 4.5 percent, or $2.82, to $59.82 after it said the slowdown in the housing sector could make it more challenging to make money.
Lowe's also cut its second-quarter profit forecast and full-year sales forecast for stores open at least a year.
That hurt shares of rivals Home Depot Inc. (HD), the world's largest home improvement retailer, and Sears Holdings Corp.(SHLD), which sells large appliances, power tools and other products whose demand is driven by home sales. Home Depot's stock fell 1.2 percent, or 45 cents, to $38.49 on the NYSE, while Sears shares lost 2.2 percent, or $3.54, to $158.35 on the Nasdaq.
Volume was heavy on the NYSE, with about 2.05 billion shares changing hands, above last year's daily average of 1.61 billion, while on Nasdaq, about 2.30 billion shares traded, above last year's daily average of 1.80 billion.
Declining stocks outnumbered advancing ones by a ratio of 2 to 1 on the NYSE and by about 7 to 3 on Nasdaq.