According to preliminary calculations, the Dow Jones industrial average is ending down 29.23, or 0.3 percent, at 8,474.85.
A record low in housing construction has led investors to doubt the economy again.
Stocks ended narrowly mixed in light trading as the surprise drop in construction and a cautious outlook from retailer Home Depot Inc. caused energy and utility stocks to pare gains.
According to preliminary calculations, the Dow Jones industrial average fell 29.23, or 0.3 percent, to 8,474.85.
Construction of homes and apartments fell 12.8 percent last month to the lowest pace on records going back a half-century, the Commerce Department said. Analysts had expected housing starts to rise.
The report did contain some positive signs, including a rebound in single-family construction that partly offset a drop in apartment construction. And a sharp pullback in construction is necessary to rid the housing market of excess inventory, many analysts pointed out.
By this point, though, investors were hoping for evidence that the three-year slide in housing is ending — something that is vital for the broader economy to rebound.
"It's hard enough to get going after you've been up 30 percent in the S&P 500 in 10 weeks," said Hugh Johnson, chief investment officer of Johnson Illington Advisors. "When you have news that's as deflating as this, it gets nearly impossible."
On Monday, encouraging news from Home Depot rival Lowe's Cos. and an improving outlook for banks had pushed the Standard & Poor's 500 index back into positive territory for the year. It's still up for 2009 after Tuesday's dip, but hanging on by just five points.
Home Depot was the biggest loser in the Dow Tuesday, falling $1.39, or 5.3 percent, to $24.63 after saying its markets are still under pressure. Profits at the nation's largest home improvement retailer climbed 44 percent, better than expected, as the company booked fewer charges.
Broader stock indicators were mixed. The S&P 500 index fell 1.58, or 0.2 percent, to 908.13, while the Nasdaq composite index rose 2.18, or 0.1 percent, to 1,734.54.
About three stocks rose for every two that fell on the New York Stock Exchange, where volume came to 1.35 billion shares.
In a positive sign for Wall Street, one measure of the market's uneasiness fell again after sliding 8.7 percent Monday. The Chicago Board Options Exchange Volatility Index, or the VIX, fell below 30 on Tuesday for the first time since September. It hit a record 89.5 in October at the height of the financial market meltdown. The historical average is 18-20, well below Tuesday's level of 28.8, but the decline signals that investors are more confident about the stock market's direction.
David Kelly, chief market strategist at JPMorgan Funds, said the drop in expectations for volatility and the market's relatively calm response to bad economic news in light trading is a departure from only months ago when stocks likely would have tumbled sharply.
"The market was assuming the economy would never come around. Even though we are waiting for a turnaround, this certainly is indicative of an economy that is stabilizing," he said.
Kelly added that every day without another proverbial shoe dropping helps traders build confidence.
"Every shoeless day is a good day," he said.
Another sign that the rally has staying power is the strength in industries such as basic materials, industrials and technology, Johnson said. These are the types of companies that usually perform well in a market comeback.
"It's not just that the stock market has been going up — it's that the right sectors have been leading the performance parade," Johnson said.
Rising prices for oil and materials lifted energy and commodity stocks. Rising prices are often seen as a sign that investors are expecting economic activity will increase and drive demand for raw materials. Peabody Energy Corp. rose 89 cents, or 2.9 percent, to $31.65, while the utility PPL Corp. rose $1.18, or 3.8 percent, to $31.94.
Light, sweet crude rose 62 cents to $59.65 a barrel on the New York Mercantile Exchange.
Credit card companies lost ground after the Senate voted to prevent them from arbitrarily raising consumers' interest rate and charging many of the high fees that have become customary. American Express Co. fell $1.34, or 5.1 percent, to $24.79, while Capital One Financial Corp. fell $1.16, or 4.5 percent, to $24.90.
In other trading, the Russell 2000 index of smaller companies fell 1.53, or 0.3 percent, to 493.26.
Bond prices were mixed. The yield on the 10-year Treasury note was unchanged at 3.24 percent.
The dollar fell against other major currencies, while gold prices rose modestly.
Overseas, Britain's FTSE 100 rose 0.8 percent, Germany's DAX index rose 2.2 percent, and France's CAC-40 rose 0.9 percent. Japan's Nikkei stock average jumped 2.8 percent.