The market was coming off seven consecutive trading days of gains amid a year-end rally that vaulted the Standard & Poor's 500 and Nasdaq composite indexes to four-year highs, fed by an improving economic landscape and mounting eagerness for strong sales in December.

But while some of the nation's retailers reported a solid opening to the holiday shopping season, other merchants said shopper traffic tailed off once Friday's bargains passed. Retail stocks fell despite Wal-Mart Stores Inc. and J.C. Penney Co. posting better-than-expected numbers.

Meanwhile, sharply lower oil prices did little to energize the market, although a recent slide in crude futures has helped temper fears about higher energy costs eating into consumer spending this year.

Despite a clouded holiday retail sales outlook, Steve Neimeth, senior vice president and portfolio manager for AIG SunAmerica, said the broader picture remains positive.

"Bottom line, the consumer is extremely healthy and sentiment is good," Neimeth said. "I believe they will be spending heavily this year, and that December retail sales will beat expectations."

According to preliminary calculations, the Dow Jones industrial average lost 40.90, or 0.37 percent, to 10,890.72.

Broader stock indicators retreated from their highest levels since mid-2001. The S&P 500 slid 10.79, or 0.85 percent, to 1,257.46, and the Nasdaq fell 23.64, or 1.04 percent, to 2,239.37.

Bonds advanced, with the yield on the 10-year Treasury note falling to 4.41 percent from 4.43 percent late Friday. The dollar was mixed against other major currencies in European trading, and gold prices were little changed.

Forecasts for mild weather in the Northeast took crude futures lower. A barrel of light crude dropped $1.35 to settle at $57.36 on the New York Mercantile Exchange.

This week brings a spate of key economic reports on gross domestic product growth, spending and employment. Closely watched data that could move the market are scheduled for release each day and could be the reason for today's selloff, said Rick Pendergraft, an equity trader with Schaeffer's Investment Research.

"Today might be a breather," Pendergraft said. "People might also be wanting to take gains off the table ahead of these (economic) reports, not knowing how they're going to turn out."

Neimeth noted that investors may have found some weakness from declining sales of existing homes amid growing indications that the real estate market is starting to cool off. The National Association of Realtors said existing home sales sank 2.7 percent to 7.09 million in October, below economists' forecast for 7.29 million.

"It appears we may have finally reached a peak in the housing market," Neimeth said. "Going forward, falling home prices could be in store."

Traders pulled out of the retail sector as they tried to make sense of conflicting sales reports, though many are waiting for storeowners to release November results later this week. Wal-Mart lost 49 cents to $50 and J.C. Penney fell $1.22 to $52.88, while Target Corp. also sank 51 cents to $54.72.

Elsewhere, discount retailer Kohl's Corp. declined $2.18 to $47.02, and Federated Department Stores Inc. dropped $2.49 to $64.58.

Merck plans to slash 11 percent of its work force and shut five manufacturing plants by 2008 as the company struggles with legal woes over its Vioxx painkiller and faces losing patent protection for another top-selling drug, cholesterol reducer Zocor. The news sent shares sliding $1.42 to $29.56.

American Pharmaceutical Partners Inc. is buying its largest shareholder, American BioScience Inc., for about $4.1 billion and will rename the new firm Abraxis BioScience. American Pharmaceutical sank $8.36 to $39.25.

Constellation Brands Inc., the world's biggest winemaker, raised by 6 percent to $1 billion its takeover offer Canadian rival Vincor International Inc. Constellation slipped 32 cents to $22.72.

Delphi Corp. said it would accelerate restructuring talks with former parent General Motors Corp. as it works to emerge from bankruptcy and make a deal with its unions to lower wages. GM rose 36 cents to $23.22.

Declining issues led advancers by 11 to 5 on the New York Stock Exchange, where volume came to 1.5 billion shares. On Friday, the markets closed early at 1 p.m. EST.

The Russell 2000 index of smaller companies was down 12.08, or 1.77 percent, at 671.50.

Overseas, Japan's Nikkei stock average surged 1.37 percent. Britain's FTSE 100 lost 0.84 percent, Germany's DAX index fell 0.34 percent, and France's CAC-40 was lower by 0.55 percent.