Clouds darkened over the euro zone as rising borrowing costs prompted the European Central Bank to buy Italian and Spanish bonds, though not aggressively enough to bolster markets.
Separately, the Bank of England said the outlook for Britain's economy was bleak, citing the euro zone's debt crisis as the country's "single-biggest risk" and leading it to slash its growth forecast for both 2011 and 2012 to 1 per cent.
The tide of grim news from Europe overwhelmed more positive data on the world's biggest economy. Consumer prices dropped for the first time in four months in October, while industrial output rose more than forecast in October.
In afternoon trading in New York, the Dow Jones Industrial Average fell 0.36 per cent, the Standard & Poor's 500 Index dropped 0.36 per cent and the Nasdaq Composite Index declined 0.34 per cent.
"The US economic numbers are starting to improve, but it's all being trumped by what's going on in Europe," Alan Lancz, president of an investment advisory firm based in Toledo, Ohio, told Reuters. "The contagion of spreading into other countries is what's worrying us."
US consumer prices fell 0.1 per cent in October, the Labor Department said. It's the first drop in four months, and a boon for consumers. Weekly earnings increased 0.3 per cent last month when accounting for inflation, according to a separate Labor Department report.
Output at factories, mines and utilities climbed 0.7 per cent after a revised 0.1 per cent drop in September, figures from the Federal Reserve showed. The median forecast of 83 economists surveyed by Bloomberg News called for a 0.4 per cent gain in production. Estimates ranged from increases of 0.1 per cent to 0.8 per cent.
"The consistent theme in the recent flow of economic data has been one of accelerating momentum in economic activity," Millan Mulraine, a senior macro strategist at TD Securities in New York, told Reuters.
"Nevertheless, the concern for the recovery continues to be about what happens in Europe, as any escalation in the unfolding debt crisis could present a significant obstacle for the economic recovery."
Dell shares fell more than 2 per cent after its quarterly earnings fell short of expectations and the maker of personal computers forecast sluggish sales for the rest of the year.
In Europe, the Stoxx 600 Index ended the day unchanged.
In Italy, Mario Monti was confirmed by lawmakers as the country's prime minister, while in Greece new Prime Minister Lucas Papademos won a confidence vote in parliament that will allow him to move forward with budget measures.
The bond buying by the ECB proved a temporary fix as Italian yields, which initially slid to about 6.83 per cent later climbed back above 7 per cent.
France appeared to plead for stronger intervention by the EU's central bank as the nation's top-notch AAA-credit rating is under threat, according to Reuters.
"The ECB's role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures to ensure financial stability in Europe," government spokeswoman Valerie Pecresse said after a cabinet meeting in Paris, Reuters reported.
The euro dropped as a result, last 0.3 per cent lower on the day at US$1.3504.
"The market is very much on tenterhooks about the European auctions," Boris Schlossberg, director of research at the online currency trader GFT Forex in New York, told Bloomberg News. "If the French debt comes out and goes badly, that will really send a signal that contagion has spread to and infected the core."