US close: Debt worries dampen Street

US debt limit worries added to the negative mood on Wall Street on Monday, while the European debt crisis and contagion concerns rolled on.

The Dow fell 95 to 12,385, the Nasdaq dropped 25 to 2,765, while the S&P 500 finished 11 under at 1,305.

With just over two weeks to go before the US is expected to reach the $14.3 trillion debt ceiling, Republicans were still holding out against tax increases, but president Obama hopes that a deal that will close tax loopholes for wealthy American citizens and firms, combined with government spending cuts, can be reached.

"[O]wing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days," credit rating agency Standard & Poor's said last Thursday.

Fellow rating agency Moody's said on Monday, "Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis." The agency added that if the US was to default, it "would fundamentally alter Moody's assessment of the timeliness of future payments."

Meanwhile, Friday’s European banking stress tests were seen as something of a damp squib by markets after they failed to adequately analyse the impact sovereign debt default would have on the Continent's banks.

Financials were under pressure as a result, with Bank of America, Goldman Sachs and Morgan Stanley all falling to two-year lows.

Media conglomerate News Corp was in the red ahead of a meeting in UK parliament with chairman Rupert Murdoch and his son James concerning the phone-hacking scandal first revealed on 4 July. Reports have surfaced calling for a boardroom shake-up following the closure of its UK tabloid newspaper the News of the World. Shares have dropped 17.4% over the past two weeks.

Cisco Systems, the networking and electronics firm, rose in after-hours trading after it said it would cut 6,500 workers in an effort to reduce costs, 2,100 of which who have opted for voluntary early retirement.

IBM jumped higher after the bell after second quarter sales of $26.7bn - which were 12% higher than last year - topped estimates of around $25.4bn.

After the close, gold futures were 1% higher at a record $1,605.70 per ounce.