Some traders said the sudden afternoon swoon was tied to investors rebalancing their holdings at the end of the month. Even with the late plunge, the Dow was up almost 2 percent for the month and recorded its first gain in May since 2009. The S&P 500 index has risen by 2.1 percent.
The S&P 500 has fallen only in one month, October, over the past year.
The "Sell in May" tactic is part of the Stock Trader's Almanac's "Best Six Months" strategy, which recommends investing in the Dow between Nov. 1 and April 30 each year and then switching into fixed income for the remainder of the year.
The Dow rose an average of 7.5 percent from November to April between 1950 and 2011, according to this year's Almanac. The average gain over the six-month period from May 1 to Oct. 31 was only 0.3 percent
On Friday, there was both encouraging and disappointing news on the economy.
Stock indexes started the day slightly lower after the government reported that Americans cut back on spending. Consumer spending fell 0.2 percent in April, the first decline since last May, the Commerce Department said.
That news was offset by a report released later showing that a measure of U.S. consumer confidence jumped to the highest level in almost six years in May, lifted by rising home prices and record-high stock prices.
The University of Michigan's consumer sentiment index rose to 84.5 in May, up from 76.4 in April and the highest level since July 2007. Investors are hoping that increasingly confident consumers will step up their spending, which would contribute to U.S. economic growth.
The Dow closed down 208.96 points, or 1.4 percent. It was the biggest loss for the index since April 15, when markets plunged after worries about an economic slowdown in China caused commodity prices to drop sharply.
The Standard & Poor's 500 index fell 1.4 percent, and the Nasdaq composite declined 1 percent.
In government bond trading, the yield on the 10-year Treasury note rose to 2.13 percent from 2.12 percent late Thursday. The yield has risen by half a percentage point since the start of the month and is the highest it's been since April 2012.
Rates have risen on concern that the Federal Reserve is considering easing back on its purchases of $85 billion in bonds every month.
The sharp rise in Treasury yields could be trouble for the market if it continues unabated, said David Bianco, chief U.S. equity strategist at Deutsche Bank. The yields on Treasury notes are benchmarks for setting interest rates on many kinds of loans to consumers and businesses. If they rise quickly, lending rates would rise, too, holding back the economy by discouraging borrowing and spending.
"I'm not bearish, but I'm a little bit cautious," Bianco said.