By late afternoon, the sell-off accelerated further, bringing the Dow down more than 7 percent for the year. The S&P 500 index was down more than 5 percent for 2013.
Some stock watchers took the market's decline in stride. They considered it a necessary recalibration following the market's record highs at the end of last year.
"It's a bit painful for investors to see the equities markets drop as they have, but this is healthy for this market," said Chris Gaffney, a senior market strategist at EverBank. "We've been almost 2-1/2 years without a 10 percent correction."
All told, the Dow dropped 326.05 points, or 2.1 percent, to close at 15,372.80, its biggest decline since June 20, 2013. The Standard & Poor's 500 index lost 40.70 points, or 2.3 percent, to 1,741.89. The Nasdaq composite dropped 106.92 points, or 2.6 percent, to 3,996.96.
There were signs of worry throughout the market. The VIX index, a measure of stock market volatility, rose to its highest level since December 2012. Investors shifted into U.S. government bonds, pushing yields lower and extending their sharp decline since the start of the year.
Staffing company Robert Half International declined the most among stocks in the S&P 500 index. CarMax and Pfizer were among the few stocks to eke out gains on the day.
Cold U.S. weather emerged as common problem for the economy last month.
Investors were discouraged Monday by a private survey showing U.S. manufacturing barely expanded last month as frigid temperatures delayed shipments of raw materials and caused some factories to shut down. Construction spending rose modestly in December, slowing from healthy gains a month earlier.
Automakers also piled on the disappointing news, as an icy January slowed vehicle purchases.
Ford shares slipped 41 cents, or 2.7 percent, to $14.55 and General Motors shares fell 83 cents, or 2.3 percent, to $35.25 after the automakers reported a drop in U.S. January sales, hurt by harsh weather that kept customers away from dealerships.
GM sales fell 12 percent, while Ford said sales fell 7 percent. Chrysler bucked the trend with U.S. sales gains of 8 percent, and analysts still expect U.S. auto sales to reach more than 16 million this year _ a return to pre-recession levels.
"Investors had expectations going into 2014 of a much stronger U.S. economic recovery than actually what we're seeing and we've had to reset our expectations," Gaffney said.
Fresh signs of weakness in China also weighed on the minds of investors.
An official Chinese manufacturing survey released over the weekend showed factory output grew at a slower rate in January compared with December. The report released on the weekend followed an HSBC survey that showed an outright contraction in manufacturing.
Any signs of slowdown in China's economy _ the world's second-largest _ can spell bad news because it drives exports and is a key trading partner for developing countries such as South Africa and Indonesia that supply Chinese factories with raw materials.
Investors have been looking for more pullbacks this year and possibly a correction, the technical term for when a stock market index like the S&P 500 falls 10 percent or more. Three months ago, analysts at Goldman Sachs said there was roughly a 60 percent chance that a correction would happen this year.
Monday's slide moved the market closer to that possibility.
Among other negative signs for the market: In 2013, the Dow had only one 300-point-plus down day. It's had two 300-plus drops in 2014, barely two months in.
"I think we are in correction phase and the bias will be to the downside for a while longer," said Frank Davis, director of trading at LEK Securities. "It would make sense to see a healthy pullback after last year. Air has to come out of the market."
All 10 sectors in the S&P 500 index fell, and telecommunications stocks posted the biggest declines, weighed down by AT&T and Verizon Communications.
Mattel fell $1.79, or 4.7 percent, to $36.05. The world's largest maker of toys reported on Friday that sales of Barbie and Fisher-Price preschool items dropped in its fourth quarter.
Also among the decliners: Jos. A Bank Clothiers, which fell $2.83, or 5 percent, to $53.39 on continued doubts that a takeover bid by rival clothier Men's Wearhouse will go through. The two retailers have been dueling since October when Jos. A. Bank offered $2.3 billion for Men's Wearhouse.
A few stocks posted gains.
Pfizer rose 20 cents, or 0.7 percent, to $30.60, after the company reported that a mid-stage study of an experimental drug for advanced breast cancer met the main goals. The drug is seen as a potential huge seller. Pfizer was the only stock to rise among the 30 members of the Dow.
Facing lower stocks and global jitters, investors moved into the relative safety of U.S. government bonds. Bond prices rose, and the yield on the U.S. 10-year Treasury note fell to 2.58 percent from 2.65 percent on Friday. The 10-year has had a dramatic move in the last two weeks. In mid-January, the 10-year note was trading at a yield around 2.9 percent.
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AP Markets Writer Ken Sweet contributed to this report from New York.
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