The KBW Bank index slid 4.90% with Bank of America Corp and Citigroup Inc dropping more than 5 % each.
Alarm bells rang in bond markets after the US Treasury yield inverted for the first time in more than a decade, suggesting that a recession could be on its way.
BOND YIELDS: Bond prices rose. This has not occurred since 2007.
A day after global stocks rallied on a weekend US-China announcement suspending new tariffs, global markets mostly pulled back as investor focus shifted to the murkiness over what was agreed to and the difficulty reaching resolution to disputes on thorny matters such as intellectual property. "Unless extended, they will end 90 days from the date of our wonderful and very warm dinner with President Xi in Argentina". JPMorgan Chase sank 4.5 percent.
"The sense is that there's less and less agreement between the two sides about what actually took place", Delwiche said.
The S&P 500 index lost 8 points, or 0.3 per cent, to 2,782.
The trade dispute has rattled markets in recent months as signs emerged that it has begun affecting corporate profits.
A note from S&P Global Ratings predicted that USA growth would slow from 2.9 per cent in 2018 to 2.3 per cent in 2019 and 1.8 per cent in 2020, adding that the U.S. was nearing the "latter" stages of a multi-year growth cycle. -China trade war and a possible economic slowdown.
Financial stocks also weighed the market down as the bond market signaled fears of a weakening economy.
Chipmakers were among the biggest decliners in a technology sector slide.
MARKETS OVERSEAS: In Europe, Germany's DAX fell 0.6 percent, while France's CAC 40 dropped 0.4 percent.
Homebuilders fell after luxury homebuilder Toll Brothers issued a cautious assessment of the housing market. Toll's shares rose 0.4 percent to $33.67, recovering from a morning sell-off.
Apple lost 3.7 per cent to $177.99 after the consumer electronics giant was downgraded by HSBC analysts, citing the possibility that iPhone volume and value growth may moderate due to a saturated mobile phone market.
DISAPPOINTING DOLLAR: Discount retail chain Dollar General slid 5.6 percent to $105.50 after the company reported weak quarterly results.
Oil prices headed higher ahead of an OPEC meeting on Thursday, where members are expected to agree to cut output in 2019. Benchmark U.S. crude gained 0.6 percent to settle at $53.25 per barrel in NY. Brent crude, the worldwide standard, added 0.9 per cent to $62.22 per barrel in London.
CURRENCIES: The dollar weakened to 112.91 yen from 113.69 yen late Monday.
Small-company stocks, which investors see as more risky than large multinationals, fell more than the rest of the market. The euro strengthened to $1.1349 from $1.1342. The FTSE 100 index of leading British shares slid 0.6 percent. Hong Kong's Hang Seng added 0.3 percent. The S&P ASX/200 in Australia gave up 1 per cent.