The S&P 500 neared its 200-day moving average of 1,380.74, seen as a key level of support for the market. On Wednesday the benchmark index dropped more than 2 percent for the biggest decline since June 1.

Investors worry that if no deal is reached in Congress over some $600 billion in spending cuts and tax increases due to take effect early next year, the struggling U.S. economy could fall into recession.

But government data released on Thursday showed a better-than-expected drop in weekly first-time claims for unemployment benefits as well as a rise in U.S. exports, news that briefly lifted stock index futures a day after the market suffered a post-election plunge.

The prospect of haggling between lawmakers to rein in ballooning federal budget deficits has deepened the uncertainty for investors, who have sold stocks on the expectation taxes will go up on capital gains and dividends.

How does an investor adapt to the new tax regime and the potentially lower after-tax return on some of these assets, some of these stocks? They react by selling, said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

The top drag on the Dow was McDonald's Corp, which fell 2 percent to $85.11 after the world's largest hamburger chain reported a 1.8 percent drop in October sales at established restaurants around the world, its first monthly sales fall since March 2003.

The Dow Jones industrial average was down 66.91 points, or 0.52 percent, at 12,865.82. The Standard & Poor's 500 Index was down 9.86 points, or 0.71 percent, at 1,384.67. The Nasdaq Composite Index was down 27.94 points, or 0.95 percent, at 2,909.35.

The three major U.S. indexes shed more than 2 percent Wednesday as investor focus returned to Europe's economic troubles and the looming fiscal cliff following the re-election of President Barack Obama.

While a comprehensive agreement to avoid the automatic spending cuts and tax increases of the fiscal cliff was possible, a more likely scenario is for political leaders to find a temporary fix to buy time until the new Congress and Obama are sworn in, which is in January.

Other declining shares included Apple, which was down sharply for a second day. The stock fell 2.9 percent at $541.75 and has fallen more than 20 percent from its Sept. 21 all-time intraday high.

The U.S. trade deficit narrowed in September as exports rose while jobless claims dropped, although last week's damaging storm along the U.S. East Coast distorted the data.

Qualcomm Inc was a bright spot, up 6 percent at $61.61 as the biggest boost to both the S&P 500 and the Nasdaq 100 after the leading supplier of chips for cell phones reported quarterly revenue Wednesday that beat expectations.