Stocks opened by hopping between small gains and losses, pulled up by news about fewer unemployment claims and down by the continuing lack of a budget deal in Washington.
Then, stocks turned decisively downward at mid-morning, unnerved by twin fetters: a report that consumer confidence fell to its lowest level since August, and a warning from the Senate Majority Leader, Democrat Harry Reid, that he feared the government would miss the Monday night deadline for working out a budget compromise.
A bright spot of economic news, an increase in sales of new homes, couldn't distract investors from worries about the budget impasse. Both Republicans and Democrats demanded that the other side take the initiative in compromising. The Dow Jones industrial average fell as much as 150 points, more than 1 percent.
Then, just as the Dow appeared headed toward a triple-digit loss, it whipsawed again, this time higher, after House leaders announced in the late afternoon that the chamber would meet Sunday evening to work on the budget.
At the close, stocks trimmed their losses but still closed lower. The Dow finished down 18.28 points to 13,096.31. The Standard & Poor's 500 index fell 1.73 to 1,418.10. The Nasdaq composite index lost 4.25 to 2,985.91.
Until recently, investors were treating the "fiscal cliff" with a measure of nonchalance. Stocks rose more or less steadily from mid-November until late last week.
But now, with the "fiscal cliff" deadline just days away and no deal in sight, more investors are paying attention.
"This is a matter of a few personalities; it isn't something where you can analyze spreadsheets to figure out what's going on," said David Kelly, chief global strategist at JPMorgan Funds. "There are very few investors on one side or the other who have wanted to make a strong bet on this one."
Many investors believe that the higher taxes and lower government spending could push the U.S. back into recession.
"This is not small potatoes," said Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors in Albany, N.Y. "We're not going to miss a recession by much in 2013 as is."
To be sure, plenty of traders think the "fiscal cliff" is overhyped. Even if the government misses the Monday deadline, the higher taxes and lower government spending would take effect only gradually, and Congress could always repeal them.
Still, that doesn't mean they're not worried about the economy in general.
Derrick Irwin, portfolio manager for Wells Fargo Advantage Funds, said he's "not particularly concerned" about the fiscal cliff but he is concerned about the economy.
"The economy is going to do what the economy is going to do," Irwin said, "it just doesn't look too good."
Trading volume was light, with many investors still on Christmas vacation. About 2.8 billion shares traded hands, compared to an average this year of about 3.6 billion. Light volume can make the market more volatile. When fewer shares are changing hands, relatively small trades can move the overall market.
The yield on the 10-year Treasury note edged down to 1.74 percent from 1.75 percent.
Among stocks making big moves:
Chipmaker Marvell Technology Group dropped more than 3 percent, falling 26 cents to $7.14, after the company lost a patent case brought by Carnegie Mellon University. Marvell said it would fight the $1.2 billion ruling.
JCPenney fell nearly 6 percent, losing $1.23 to $19.52, after rising more than 4 percent the day before. The stock has been volatile as the company tries to remake its image to attract younger shoppers.
Steinway Musical Instruments fell more than 4 percent, down $1.02 to $21.50, after announcing that it doesn't plan to seek buyers.
AP Business Writer Daniel Wagner contributed from Washington.