Wall Street sank as Senate Majority Leader Harry Reid warned the US appeared set to head over the so-called fiscal cliff as an agreement between Democrats and Republicans before the year-end deadline seems unlikely.
"I don't know time-wise how it can happen now," Mr Reid said in the Senate. He blamed Republicans for a lack of cooperation.
Americans are worried too. Consumer confidence weakened more than anticipated in December, as the Conference Board's index of sentiment dropped to 65.1 from a revised 71.5 reading the prior month. To be sure, consumers' assessment of current conditions improved in December, according to the board.
"The sudden turnaround in expectations was most likely caused by uncertainty surrounding the oncoming fiscal cliff," Lynn Franco, the board's Director of Economic Indicators, said in a statement. "While consumers are quite negative about the short-term outlook, they are more upbeat than last month about current business and labour market conditions."
In afternoon trading in New York, the Dow Jones Industrial Average, the S&P 500 Index and the Nasdaq Composite Index had all dropped abut 1%.
US Treasuries, however, benefitted as investors sought refuge from the fiscal uncertainty and the potential impact on the economy and corporate profits.
"It's clear heels are dug in in Washington, and we seem to be moving further away from a resolution and closer to the possibility of going over the cliff," Scott Graham, head of government bond trading at Bank of Montreal's BMO Capital Markets unit in Chicago, one of the 21 primary dealers that trade with the Federal Reserve, told Bloomberg News.
"The fear and worry is pushing stocks lower and Treasuries higher," Mr Graham said.
Still, the latest data on the labour and housing market bested expectations. Purchases of new houses climbed 4.4 percent in November to a 377,000 annual pace, the highest level in more than two years, according to Commerce Department data.
Applications for jobless benefits dropped 12,000 to 350,000 in the week ended December 22, according to Labor Department figures.
"If you could take the fiscal cliff off the table, if you could get the gorilla out of [the] corner of the room, the platform for growth in 2013 is looking reasonably solid," John Ryding, chief economist of RDQ Economics in New York, told Bloomberg News. "But how do you get the gorilla out of the room? That's the problem."
In Europe, the Stoxx 600 Index eked out a gain of just under 0.1% from the previous close. National benchmark stock indexes also moved higher in Frankfurt and Paris, while London was steady.