Safe-haven gold prices also rose above $1,300 an ounce as the market focused on increased turmoil in the Middle East and tensions following last week's downing of a Malaysian jetliner over Ukraine.

Israeli jets, tanks and artillery continued to pound Gaza as the death toll from a two-week conflict topped 500. Reports that Ukrainian forces were moving into the eastern city of Donetsk added to concerns that the conflict in one of Europe's biggest countries may escalate.

Shocks to the system from Ukraine and Israel's ground invasion of Gaza come at a time when markets have been worried about economic growth on both sides of the Atlantic.

The United States and the EU last week announced further economic sanctions against Russian interests before the jet was shot down.

But Germany and other European Union members have taken a more cautious line on moves against Russia than the United States, mindful of the damage an exchange of sanctions with one of their main energy providers could do to Europe's economy. The Bundesbank said on Monday the German economy probably stagnated in the second quarter.

"We're certainly paying attention to the issues abroad, but right now, they don't seem like the kind of events that will have anything beyond a short-term impact," said John Chisholm, chief investment officer at Acadian Asset Management in Boston. "We expect these uncertainties to be reversed in two or three weeks."

The Dow Jones industrial average fell 48.45 points or 0.28 percent, to end at 17,051.73, the S&P 500 lost 4.59 points or 0.23 percent, to 1,973.63 and the Nasdaq Composite dropped 7.44 points or 0.17 percent, to 4,424.70.

MSCI's All-World Index was down 0.2 percent, while European stocks closed down 0.5 percent.

The overseas headlines overshadowed some upbeat U.S. earnings.

Shares of Halliburton Co rose 0.1 percent to $71 after the world's No. 2 oilfield services provider reported a 20 percent increase in quarterly profit.

So far this reporting period, 66 percent of S&P 500 companies are beating Wall Street's profit expectations, according to Thomson Reuters data. That is above the 63 percent average since 1994.

In the foreign exchange market, the U.S. dollar held steady against major currencies. Demand for traditional safe-haven yen and Swiss francs persisted but was not strong enough to push them out of recent trading ranges against the dollar, as traders have been assessing whether the violence in Gaza and Ukraine would affect the global economy, analysts said.

The greenback was little changed against the yen at 101.36 yen with benchmark Treasury yields hovering at their lowest in over seven weeks. The dollar slipped 0.1 percent against the Swiss franc, last trading at 0.8978 franc.

The benchmark 10-year U.S. Treasury note was up 2/32 in price to yield 2.474 percent, while the 30-year Treasury bond was up 17/32 in price, pushing the yield down to 3.264 percent. The long bond's yield fell as low as 3.249 percent, the lowest since June 2013.

"The buying in Treasuries is possibly geopolitical," said Jonathan Rick, rate derivatives strategist at Credit Agricole in New York. "We had the aggressive move on Thursday, then we had the sell-off on Friday, so this might have been just a reversal from that sell-off."

Investors were also bracing for an interest rate hike from the Federal Reserve next year, with the gap between short- and long-term interest rates, mainly the spread between yields of 2-year notes and 10-year bonds, contracting on Monday to its narrowest since June last year.

U.S. oil prices climbed as the threat of escalating tension between Russia and the West over the crisis in Ukraine mounted, while August U.S. crude zoomed higher prior to its expiry. U.S. crude was up $1.46 at $104.59, while Brent crude oil was up 44 cents at $107.68.

Spot gold gained 0.2 percent at $1,312.50 an ounce.

(Additional reporting by Patrick Graham in London and Ryan Vlastelica and Gertrude Chavez-Dreyfuss in New York; Editing by Susan Fenton, Nick Zieminski and Dan Grebler)

By Caroline Valetkevitch