While Wall Street has usually opened the new year with a buying spree, investors were picky, favoring large-caps with solid balance sheets over small-caps and more speculative bets. Analysts said Wall Street's customary new year buying could have been accelerated by the market's rally in November and December.

"Usually, you see a lot more speculative trading to start the new year, with all the new money coming in," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "But here, you're seeing a big move to quality, large-cap stocks. I think there's been a realization that these stocks are attractively priced."

As investors sold off stocks, they overlooked a sharp drop in crude futures, triggered by mild weather in the Northeast and reports of increased crude production. The drop could be good news for consumer spending, which accounts for two-thirds of the nation's economy. A barrel of light crude was quoted at $42.13, down $1.32, on the New York Mercantile Exchange.

According to preliminary calculations, the Dow Jones industrial average fell 53.58, or 0.5 percent, to 10,729.43.

Broader stock indicators fell sharply. The Standard & Poor's 500 index was down 9.84, or 0.81 percent, at 1,202.08, and the Nasdaq composite index tumbled 23.29, or 1.07 percent, to 2,152.15.

A mix of economic news further sapped any momentum stocks may have enjoyed. Construction spending took an unexpected hit in November, falling 0.4 percent for the month, the Commerce Department said. Investors had been expecting a rise of 0.4 percent after October's 0.3 percent gain.

The Institute for Supply Management's manufacturing index rose to 58.6 in December, from 57.8 in the previous month and edging past Wall Street's prediction of 58.5. The index measures the strength of manufacturing activity in the United States. However, Hugh Johnson, chief investment officer at First Albany Corp., noted that a breakdown of the ISM report showed problems, most notably in a lack of employment and production volume.

"There were certainly aspects of the ISM report that were not comforting," Johnson said. "But overall, when you look at the big picture, there is some argument that the real concern is the market moved too far, too fast in the fourth quarter, and I think you're starting to see some sophisticated portfolio managers take money off the table."

While the majority of retailers were expected to report their holiday sales results Thursday, Wal-Mart gave Wall Street a preview of its sales results, which were better than expected and sparked hope that other retailers would fare similarly.

Sales at Wal-Mart stores open at least a year rose 3 percent for December, prompted by strong after-Christmas sales. The company's previous forecasts were in the middle of a 1 percent to 3 percent range. Wal-Mart gained 53 cents to $53.35.

Drug store chain Walgreen Co. jumped $2.01 to $40.38 after the company reported a 30.5 percent jump in profits, crediting increases in prescription and general merchandise sales. The company beat Wall Street earnings forecasts by 2 cents per share.