The sell-off was a reversal of Monday's rally, in which the blue-chip Dow reached its first record closing high since before the pandemic.
The Nasdaq's loss was capped by surging Tesla Inc shares, and small cap stocks outperformed, with the Russell 2000 reaching a new record closing high.
Monday's rally was prompted by Moderna Inc's announcement that its COVID-19 vaccine candidate appears to be 94.5% effective in preventing infection.
But a recent surge in new coronavirus cases across the United States has led several governors to enact new restrictions to prevent the disease from spiraling out of control.
"It's going to be the vaccine versus the virus, flip-flopping back and forth until we get to the point where the vaccine is rolled out," said Joseph Sroka, chief investment officer at NovaPoint in Atlanta. "It's like standing on the edge of a valley - I can look down and see the rising case loads or I can look across to the vaccine."
The retail sales report released by the Commerce Department showed spending decelerating as the holiday shopping season approaches amid a lack of forthcoming fiscal relief from Washington.
The Dow Jones Industrial Average fell 167.09 points, or 0.56%, to 29,783.35, the S&P 500 lost 17.38 points, or 0.48%, to 3,609.53 and the Nasdaq Composite dropped 24.79 points, or 0.21%, to 11,899.34.
Among 11 major sectors of the S&P 500, only energy and real estate closed in the black, with utilities and healthcare stocks faring the worst.
Third-quarter earnings season is in its final stretch, with 465 of the companies in the S&P 500 having reported. Of those, 84.5% have beaten consensus estimates, according to Refinitiv data.
This week brings quarterly results from series of high-profile retailers.
Walmart Inc beat profit expectations and posted a bigger-than-expected 6.4% annual growth in same-store sales.
Home improvement retailer Home Depot Inc also beat quarterly profit and sales estimates as consumers used stay-at-home restrictions to focus on DIY home projects.
Still, Walmart's and Home Depot's stocks fell 2.0% and 2.5%, respectively.
But Kohl's Corp jumped 11.6% after the department store chain posted a surprise quarterly profit and forecast strong margins for the upcoming holiday season.
Target Corp and Lowe's Companies Inc results are expected before the bell on Wednesday.
Shares of Tesla jumped 8.2% after S&P Dow Jones Indices announced it would add the electric automaker to the S&P 500 on Dec. 21.
Amazon.com Inc launched an online pharmacy in the United States, sending shares of rival drug retailers Walgreens Boots Alliance Inc and CVS Health Corp down 9.6% and 8.6%, respectively.
Advancing issues outnumbered declining ones on the NYSE by a 1.30-to-1 ratio; on Nasdaq, a 1.07-to-1 ratio favored advancers.
The S&P 500 posted 27 new 52-week highs and no new lows; the Nasdaq Composite recorded 119 new highs and 10 new lows.
Volume on U.S. exchanges was 10.46 billion shares, compared with the 10.30 billion average over the last 20 trading days.
(Reporting by Stephen Culp; editing by Tom Brown)
By Stephen Culp