The major averages close down by less than 1%, clawing back from deeper losses earlier in the session. The DJIA will close August up 3.5% for the month, while the S&P 500 gains 3.4% and the Nasdaq Composite is up 1.5%.

Stocks fell as investors bail on financial stocks on advice from Barron's and weakness in Chinese markets trigger concern about the ability of the global economy to recover from the recession. Energy and consumer-discretionary stocks are leading on the downside.

Today's sell-off began with a sharp drop in Chinese equities and falling commodity prices on concerns that asset prices have outpaced economic realities. The Shanghai Composite Index fell to a three-month closing low and recorded its second-biggest monthly loss in 15 years.

Markets got little support from a regional survey, the Chicago PMI, which came in at 50%, topping the consensus call for 47.0% and July's 43.4% reading. It was the strongest gain since September.

Semiconductor sales tumbled 18% in July, but the fall-off continued to moderate, topping June's sales by 5% and beating the year-over-year average decline of 25%, according to the Semiconductor Industry Association, a trade group. Nonetheless, the sector is trading lower across the board.

A measure of investor sentiment has dropped significantly. The AAII survey, which measures the percentage of individual investors who are bullish, bearish and neutral on the stock market over the coming six months, last week saw bullish sentiment falling to 34%, beneath the long-term average of 38.9%; neutral sentiment dropping to 17.5%, below the long-term average of 31.1%; and bearish sentiment climbing to 48.5%, above the long-term average of 30%. Just two weeks earlier, bullish sentiment stood at 51%; neutral sentiment registered at 16% and bearish sentiment came in at 33%.

Mergers did lend some support to the broader market.

Oilfield service company Baker Hughes Inc (BHI) said it will buy smaller competitor BJ Services Co (BJS) for $5.5 billion in stock and cash.

The Walt Disney Co. (DIS) is acquiring Marvel Entertainment Inc. (MVL) for $4 billion in cash and stock, bringing characters like Iron Man and Spider-Man into the family of Mickey Mouse and WALL-E. Disney will get the rights to 5,000 Marvel characters.