It was a fitful trading session that saw stocks tumble, claw their way back and then plummet again when the yield on the 10-year Treasury note soared to a five-year high of 5.27 percent. The climb in bond yields exacerbated jitters about mortgage rates rising, which could hurt the already sluggish housing market, and about the Federal Reserve hiking interest rates, which would slow down corporate deal-making.

Surging takeover activity had helped boost stocks to record levels until a week ago, when the benchmark 10-year Treasury note's yield passed 5 percent and began unnerving stock investors.

The rise in Treasury yields was stoked by a tepid reaction to the government's auction of $8 billion in new 10-year notes, and further aggravated by confounding comments from former Federal Reserve Chairman Alan Greenspan, who characterized the recent yield rise as "cyclical" and said he is not worried about foreign governments selling their U.S. Treasury holdings, but added that yields will likely rise in the future.

"I think Greenspan's comments are on both sides of the fence," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc. He added that with quarterly options expiring at the end of this week, the stock market is especially volatile right now.

According to preliminary calculations, the Dow Jones industrial average fell 129.95, or 0.97 percent, to 13,295.01. The blue chip index is 381 points, or 2.8 percent, below its record close of 13,676.32, reached June 4.

The broader stock indexes also declined. The Standard & Poor's 500 index fell 16.12, or 1.07 percent, to 1,493.00, while the Nasdaq composite index dropped 22.38, or 0.87 percent, to 2,549.77.

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