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Stocks drop for 3rd day as budget, debt ceiling concerns weigh

Stocks closed lower for the third-straight session on Monday, extending sharp losses from the previous week, as investors digested headlines from Fed officials and amid ongoing worries over the debt ceiling and budget wrangling in Washington.

(Watch: Art Cashin: This is 'nagging' at the market)

The Dow Jones Industrial Average declined 49.71 points to end at 15,401.38, dragged by new Dow member Goldman Sachs. Visa and Nike also officially joined the blue-chip index Monday, replacing Alcoa, Hewlett-Packard and Bank of America.

The S&P 500 dropped 8.07 points to close at 1,701.84. And the Nasdaq fell 9.44 points to finish at 3,765.29.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, spiked above 14.

Most key S&P sectors ended in the red, dragged by financials and consumer discretionary, while techs and utilities finished higher.

New York Federal Reserve President William Dudley said the central bank still needs to push hard against threats to the U.S. economic recovery, and fiscal uncertainties in particular "loom very large right now." Dudley defended the Fed's decision last week not to trim its aggressive bond-buying, arguing in a speech that any changes to the quantitative easing program mush be based on the most recent measures of economic health.

Dallas Fed President Richard Fisher said the Fed's decision to keep its bond-buying program has hurt the U.S. central bank's credibility. Fisher also criticized the White House's process of picking the next chair of the Federal Reserve.

(Read more: Pros share best bondplays regardless of taper)

BlackBerry closed 1 percent higher after the smartphone maker said it would be acquired by Canadian insurance company Fairfax Financial, for $9 a share, in a deal totaling $4.7 billion

Apple spiked higher after the tech giant announced that sales for its new iPhone had set a record, with consumers snapping up a record 9 million smartphones within the first few days of its launch. In addition, the company said there were more than 200 million downloads of its new iOS 7 platform.

Budget talks are expected to continue this week with the aim of passing a resolution to fund government beyond October 1. On Friday, Republicans passed a bill that would fund the government until December 15, but would defund Obamacare.

Daiwa Capital Market's Michael Moran warned that acrimonious debate could shake consumers and businesses' resurgent confidence and lead to a reduction in spending plans.

"This seemed to occur in 2011, when GDP in Q3 advanced only 1.4 percent in the wake of the heated debate over the debt ceiling. Discord could easily arise in the upcoming debate, as some legislators are attempting to use the new legislation to defund the Affordable Care Act, obviously a sensitive issue and a risky strategy," he said in a report.

(Read more: 'Dr. Doom' Roubinimakes case FOR the US economy)

In Europe, business activity in the euro zone grew faster than forecast in September, thanks to improvements in both Germany and France.

In Asia, shares were mixed as investors digested better-than-expected Chinese factory activity data. However, trading volumes were thin, with Japanese markets shut for a public holiday.

HSBC's flash manufacturing PMI of small and medium-sized firms in China hit a six-month high of 51.2 in September, higher than August's reading of 50.1, thanks to stronger domestic and foreign demand.