Stocks Close Lower on Weak ISM Data, 'Cliff' Worries

Stocks finished modestly lower across the board on the first trading day of the month, with the Dow and S&P 500 snapping a three-day winning streak, weighed by a weaker-than-expected manufacturing report and despite new details of a counter-offer from House Republicans to avert the "fiscal cliff."

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The Dow Jones Industrial Average fell 59.98 points, or 0.46 percent, to close at 12,965.60, led by DuPont and General Electric, while Cisco gained.

The S&P 500 declined 6.72 points, or 0.47 percent, to finish at 1,409.46. The Nasdaq slid 8.04 points, or 0.27 percent, to end at 3,002.20.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended above 16.

Most key S&P sectors closed in the red, led by materials and industrials. Telecoms eked out a small gain.

In a letter to President Obama, House Speaker John Boehner and six other House Republican leaders called for $800 billion in revenues through tax reforms and $600 billion in health savings among other offers. Net savings under the counter-offer would total $2.2 trillion. Last week's offer from the White House was soundly rejected by both House and Senate Republicans.

On Sunday, Treasury Secretary Timothy Geithner said that the Republicans would ultimately agree to raise tax rates on the rich to avert the potential economic disaster of the cliff. (Read More: What a 'Cliff' Compromise Could Look Like)

"The reason the market's not selling off dramatically with investors running for cover is because everyone universally believes there's going to be some kind of deal that will save the economy in the final hour," said Michael Sheldon, chief market strategist at RDM Financial Group. "Even if a deal is struck, we could still have another few quarters of sub-par economic growth, therefore it's hard to get too excited, although we are likely to have some sort of relief rally if the Republicans and Democrats can agree to a deal before the end of the year."

Stocks have been choppy in the recent weeks as investors reacted to a chain of mixed remarks from lawmakers in Washington on the progress of the fiscal cliff talks.

On the economic front, U.S. manufacturing unexpectedly contracted to 49.5 in November, according to the Institute for Supply Management, dropping to the lowest level in nearly three years. Economists polled by Reuters had expected a reading of 51.3. A reading below 50 indicates a contraction in the sector.

Meanwhile, construction spending climbed 1.4 percent to an annual rate of $872.1 billion in October, according to the Commerce Department, thanks to stronger spending on homes. Analysts polled by Reuters had expected a 0.5 percent gain.

"The news out of China last night was encouraging and it seems like Europe, despite a lack of any significant growth, is also doing a bit better," noted Sheldon. "But right now, the main focus appears to be here in the U.S. and what happens in terms of the fiscal cliff year-end."

In Europe, Greece announced debt-buyback plans through a Dutch auction in an effort to lower its ballooning debt. The bond repurchase is key to the efforts of its foreign lenders to put Greece's debt back on sustainable footing, and will help the debt-ridden country receive funding to avoid bankruptcy.

China manufacturing data from HSBC rose to 50.5 in November from 49.5 in October, the first time that it has grown since October 2011.(Read More: Factory Surveys Show China Reviving, Global Rebound Fragile)

On Sunday night, News Corp announced the departure of Tom Mockridge, head of its UK newspapers, widely believed to signal that he had lost out in the race to lead the company's publishing division after it is split next year to Murdoch lieutenant Robert Thomson.

Dell jumped after Goldman Sachs upgraded the company to "buy" from "sell."

Verizon also benefited from an upgrade, with the Dow component up more than 1 percent on a move from "neutral" to "buy" at Nomura, which said the telecom's "superior execution will continue to drive higher profitably." Nomura also boosted Verizon's price target from $49 to $50.

Meanwhile, Research In Motion slipped after Canaccord cut its rating on the BlackBerry maker to "cut" from "hold."

Merck rose after the pharmaceutical company started a mid-stage study of a drug to treat Alzheimer's disease.

Ford announced that its November auto sales gained 6.5 percent, topping expectations. Meanwhile, General Motors edged lower after the company posted sales that fell short of estimates.

HCA Holdings, Dish Network and Cato became the latest companies to declare special dividends ahead of the year-end.

Among earnings, PepBoys is scheduled to post results after the closing bell.