Stocks pared early declines, but remained lower for the day amid a renewal of economic and political concerns in Italy.
The Dow Jones Industrial Average was off 39 points, or 0.3%, to 14521 in afternoon trading, after falling as many as 120 points in the opening minutes of trading. The Standard & Poor's 500-stock index gave up three points, or 0.2%, to 1561, while the Nasdaq Composite slipped three points, or 0.1%, to 3250.
The declines nudged the Dow and the S&P 500 off their quest for new record highs. On Tuesday, the blue-chip Dow rallied 112 points to a new record, while the S&P 500 finished less than two points from its October 2007 record close.
The U.S. losses on Wednesday were triggered by signs of further deterioration in Europe's economic prospects. The European Commission's economic-sentiment indicator for March fell for the first time since October, to 90 from February's 91.1, below expectations of 90.5. In Italy, retail sales and industrial orders both fell far short of expectations.
On the political front in Italy, Democratic Party leader Pier Luigi Bersani's attempts to form a coalition government took a hit after the anti-establishment Five-Star Movement rejected his call for support.
In addition, Cyprus's government is preparing aggressive curbs on the flow of cash out of the country, which will cap the amount of cash people can bring out of the country, as well as the amount of credit-card purchases of goods outside Cyprus.
The Stoxx Europe 600 fell 0.5% and Italy's FTSE MIB index pulled back 0.9%, while the euro weakened to below $1.28 for the first time in four months.
The European concerns loomed large for U.S. investors, who see the turmoil there as a potential headwind after the strong start to the year.
As the end of the first quarter approaches on Thursday, Peter Tuz, president of Chase Investment Counsel, which manages about $600 million in Charlottesville, Va., has been weighing whether to pull some of his clients' money out of stocks, partly because of worries about Europe and the durability of the rally.
While Cyprus has been a concern, "what's going on in Italy is much more worrying—they've got their backs against the wall, and they can't cobble together a government," Mr. Tuz said.
For some of his clients who have 80% of their portfolio in stocks, he is considering paring that exposure to about 75%. "It might make sense to make the portfolio marginally a little more conservative after we've had this very long rally," Mr. Tuz said. "We had a great first quarter, and now we face an uncertain earnings season and greater uncertainty in Europe."
The U.S. stock declines on Wednesday were led by financial shares, amid the latest downturn in Europe's prospects. J.P. Morgan Chase led the Dow components lower, while Bank of America and Citigroup also declined.
Other decliners included blue chips Coca-Cola, Verizon Communications and Home Depot .
Asian markets closed mostly higher as encouraging earnings reports out of Hong Kong and strength in the Australian mining sector provided support. China's Shanghai Composite and Japan's Nikkei Stock Average each gained 0.2%.
Crude oil erased early declines to trade flat at $96.36 a barrel, while gold rose 0.7% to $1,606.10 an ounce. Although the dollar strengthened against the euro, it lost ground against the yen. Demand for Treasurys rose, sending the yield on the benchmark 10-year note down to 1.84%.
In U.S. economic news, pending home sales for February fell 0.4%, a touch more than expectations for a 0.3% decline.
In corporate headlines, Apple declined after the company went to court in China amid accusations that it infringed voice-recognition software used for the "Siri" personal assistant on its iPhones.
Write to Jonathan Cheng at email@example.com