Shares of banks and other financial institutions fell amid fears that political wrangling would lead the U.S. to the brink of default.
The sudden increase in Treasury yields has also weighed on the financial sector, even as it stands to increase profit margins on loans.
The yield on the 10-year Treasury note rose to 1.534%, the highest level since June, as traders positioned themselves for an imminent reduction in Federal Reserve bond purchases.
"This is an uncomfortable period for market participants as the removal of Fed support will be underway soon and equity markets will have to learn how to stand on their own again," said Charlie Ripley, senior investment strategist at Allianz Investment Management, in e-mailed commentary.
Treasury Secretary Janet Yellen warned that the U.S. would be in dire financial straits, potentially exhausting cash reserves by October 18, if Congress fails to raise the debt ceiling.
Meanwhile, Sen. Elizabeth Warren (D., Mass.) said she would oppose a second term for Federal Reserve Chairman Jerome Powell if President Biden renominates the central bank leader before his current term expires early next year.
Sunac China Holdings led a rebound in Chinese property stocks Tuesday, after the real-estate developer played down a leaked request for government help and the country's central bank signaled its support for the sector. Investors remain concerned that China Evergrande Group's struggles could spill over and cause a Chinese financial crisis.
Morgan Stanley's top female executive in Asia, Wei Sun Christianson, will retire from the bank at the end of this year after working at the Wall Street firm for nearly two decades.
Banks have announced more than $54 billion in deals through late September, the most hectic pace of mergers and acquisitions in the sector since 2008, when some big banks had to sell themselves to stave off collapse.
Write to Rob Curran at firstname.lastname@example.org
(END) Dow Jones Newswires