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Stocks tumbled at the market's opening on Monday, with the Dow dropping 1 percent, as the possibility of a government shutdown at the end of the day weighed on global markets.
The Dow Jones Industrial Average declined sharply and was down 154 points.
The S&P 500 and the Nasdaq also opened lower. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.
(Read more: DC 'shenanigans' may cap stock gains: Bob Doll)
The country is facing its first government shutdown in 17 years, with only a few hours left for the House to pass a stand-alone spending bill which will fund the government through to December 15. Budget spending must be agreed by Congress before Tuesday, to prevent a shutdown which could force federal employees to take unpaid leave.
The funding standoff is a harbinger of the next big political battle: a far-more consequential bill to raise the federal government's borrowing authority. Failure to raise the $16.7 trillion debt ceiling by mid-October would force the United States to default on some payment obligations - an event that could cripple its economy and send shockwaves around the globe.
Last week, major averages logged their first weekly drop since August with investors nervous over a potential shutdown.
Political turmoil in Italy also curbed investor sentiment after Silvio Berlusconi, the leader of the center-right party, ordered a number of his ministers to resign from the cabinet on Saturday, throwing the government into chaos.
(Read More: Italy faces new elections and economic turmoil, analysts warn)
U.S. Treasurys ticked higher, driven by a bid for safe haven assets.
Most key S&P sectors were in the red, dragged by financials and energy.
"Just as one arguing couple can ruin a large dinner party, the sight of a dysfunctional political process is an unwelcomed development for investor confidence in stocks," wrote Nicholas Colas, chief market strategist at ConvergEx Group. "If and when a government shutdown starts, the clock will start ticking on lower GDP growth rates and reductions in corporate earnings."
Many government employees will be furloughed by the absence of a deal, and if the shutdown takes place the Labor Department will postpone issuing its closely-watched monthly employment report scheduled for Friday.
On the economic front, the Chicago PMI (purchasing managers' index) and Dallas Federal Reserve manufacturing survey will be published later on Monday.
Disappointing economic data from China also sapped investors' appetite for risk. China's final reading of manufacturing activity from HSBC came in at 50.2 in September, lower from a preliminary reading of 51.2 earlier this month. Still, the data was higher from August's 50.1 reading. The Chinese Shanghai Composite outperformed as the region's sole gainer, while Japan's Nikkei index closed down 2 percent.
"This is as good as it gets for the time being. The data reflects the stimulus over the summer but don't expect too sharp an acceleration from here," said Frederic Neumann, co-head of Asian economic research at HSBC.
The pan-European FTSEurofirst 300 was down nearly 1 percent. The Italian blue-chip FTSE MIB index dropped approximately 1.5 percent, suffering its worst session in nearly six weeks.
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