By CHRIS DIETERICH

A soft reading on manufacturing activity weighed on the Dow Jones Industrial Average and fueled worries about stagnant economic growth, although stocks trimmed the worst of Tuesday's losses

The Dow Jones Industrial Average sank 54.90 points, or 0.4%, to 13035.94, as investors returned from the holiday weekend. The Dow had fallen as many as 113 points, briefly pushing below 13000, a level the blue-chip benchmark has hovered above for more than a month.

A soft monthly reading from the factory floor helped drive stocks lower and compound worries about slowing economic growth. Jonathan Cheng has details on The News Hub.

The Standard & Poor's 500-stock index dropped 1.64 points, or 0.1%, to 1404.94. The Nasdaq Composite Index reversed course and ended higher, adding 8.10 points, or 0.3%, to 3075.06.

Stocks initially plowed lower after data showed activity in the manufacturing sector slipped last month to its lowest level since July 2009, according to the Institute for Supply Management's purchasing managers' index. A separate report showed that spending on construction projects in July dropped the most in a year from the previous month.

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Chef Rocco DiSpirito, left, gets a taste of the Big Board on Tuesday. He rang the opening bell on behalf of charity Stand Up 2 Cancer.

"It's not falling off a cliff, but the economy continues to deteriorate," said Gary Flam, portfolio manager at Bel Air Investment Advisors.

Materials, industrial and energy stocks, those most closely tied to global growth, ended with the sharpest declines. Heavy-machinery maker Caterpillar (CAT) dropped $2.67, or 3.1%, $82.66, and industrial conglomerate United Technologies (UTX) sank 1.50, or 1.9%, to 78.35, the most among Dow components.

Netflix (NFLX) stumbled 3.79, or 6.4%, to 55.93, after Amazon.com (AMZN) said it signed a multiyear licensing deal with Epix, a cable channel, to bring superhero movies, including "Iron Man 2" and thousands of other titles, to Amazon's streaming service; shares of Amazon declined 39 cents, or 0.2%, to 247.88. Epix is owned by Lions Gate Entertainment (LGF), Viacom (VIAB)'s Paramount Pictures and MGM Networks. Lions Gate climbed 44 cents, or 3%, to 15.22, while Viacom slid 65 cents, or 1.3%, to 49.36.

Ford Motor (F) rose seven cents, or 0.8%, to 9.41, after the company posted a 13% improvement in August auto sales from a year ago, a boost tied to strong growth in utility-vehicle sales. Results topped expectations from car-shopping website Edmunds.com.

U.S. stock futures nudged slightly higher as investors returned from a long holiday weekend to weigh hints of government bond purchases by the European Central Bank against a negative ratings outlook for the European Union. Paul Vigna has details on The News Hub. Photo: Bloomberg.

General Motors (GM) edged down four cents, or 0.2%, to 21.31, after reporting that August auto sales rose 10%, topping estimates.

In Europe, the Stoxx Europe 600 fell 1.1% to snap a two-session winning streak. The euro zone's manufacturing purchasing managers' index contracted for the 13th month in row in August. Additionally, Moody's Investors Service cut its outlook on the European Union's triple-A credit rating to negative.

Spanish and Italian bond yields slid, as investors took comfort in reports that European Central Bank President Mario Draghi said that buying certain government bonds would fall within the central bank's mandate. Investors are looking ahead to Thursday's conclusion of the ECB's policy meeting for signs of a bond-buying program aimed at containing the euro-zone's debt crisis.

In Asia, the Shanghai Composite declined 0.8% after a reading on activity in China's manufacturing sector, released Monday, shrank in July at the fastest clip since March 2009. Japan's Nikkei Stock Average slipped 0.1%.

Crude-oil prices sank 1.2%, to settle at $95.30 a barrel, while gold prices rose 0.5%, to settle at $1,692.90 a troy ounce. The dollar rose against the euro and yen. The yield on the 10-year Treasury note rose to 1.581% as demand waned.

In deal news, Medicis Pharmaceutical (FB) jumped 12.09, or 38%, to 43.65, after Valeant Pharmaceuticals (MS) said it would acquire the company for $44 a share in a $2.6 billion deal, a 39% premium to Medicis's closing price on Friday. Valeant rose 7.51, or 15%, to 58.78.

Questcor Pharmaceuticals (QCOR) surged 4.36, or 10%, 47.80, after the U.S. government said it would allow the drug maker to pay lower rebates to state Medicaid programs for its blockbuster drug Acthar, a steroid alternative approved for a range of uses.

Campbell Soup (CPB) fell two cents, or less than 0.1%, to 35.12, inching lower even after the soup maker posted quarterly earnings and revenue that topped analyst estimates, ending a string of eight quarters with falling sales in its flagship business.

Write to Chris Dieterich at chris.dieterich@dowjones.com