US stocks have closed lower for a third straight session as heavyweight technology names extended their sell-off to send the Nasdaq into correction territory while Tesla suffered its biggest daily percentage drop after the stock was passed over for inclusion in the S&P 500.

Each of the 11 major S&P sectors were lower, led by declines in technology and energy.

Reports on Friday that SoftBank made significant option purchases during the run-up in US stocks added to investor nervousness.

Technology once again dragged indexes lower with a drop of 4.59 per cent, the third straight decline and worst three-day performance for the sector since mid-March.

Even with the recent drop, the sector remains the best performer on the year.

“Things got expensive, they ran up, they got very concentrated and people got really giddy,” said Willie Delwiche, investment strategist at Baird in Milwaukee.

“Everyone is all loaded up on one side, it doesn’t take much of a ripple to knock some apples off the cart.”

The Dow Jones Industrial Average fell 632.42 points, or 2.25 per cent, to 27,500.89, the S&P 500 lost 95.12 points, or 2.78 per cent, to 3,331.84 and the Nasdaq Composite dropped 465.44 points, or 4.11 per cent, to 10,847.69.

Energy shares slumped 3.71 per cent as oil prices fell below $US40 a barrel.

Media reports of SoftBank’s option purchases also reminded investors that market makers might have billions of dollars’ worth of long positions as hedges against options trades.

Wall Street’s rally, which has been fuelled in large part by massive amounts of monetary and fiscal stimulus, screeched to a halt last week with the Nasdaq falling as much as 9.9 per cent from its intraday record as investors booked profits after a run that lifted the index about 70 per cent from its pandemic lows.

Tuesday’s losses put the index down 10 per cent from its closing record, confirming a correction began on September 2.

At session lows on Tuesday, Facebook, , Apple, Tesla, Microsoft, Alphabet and Netflix had collectively lost more than $US1 trillion in market capitalisation since September 2.

Tesla plunged 21.06 per cent to suffer its biggest daily percentage drop as the electric-car maker was excluded from a group of companies being added to the S&P 500.

Investors had widely expected its inclusion after a blockbuster quarterly earnings report in July.

Up to Friday’s close, the stock had surged about 400 per cent this year.

JPMorgan Chase & Co fell 3.48 per cent after a report it was probing employees who were allegedly involved in the misuse of funds intended for COVID-19 relief.

The wider banks index lost 3.44 per cent, also tracking Treasury yields.

A gauge of value stocks fell 1.84 per cent but outperformed the broader market and a 3.38 per cent decline in the growth index .

Wall Street’s fear gauge climbed for the third time in four sessions.

Concerns over potential US sanctions against China’s biggest chipmaker SMIC hit domestic suppliers, with the PHLX semiconductor index down 3.43 per cent.

General Motors Co jumped 7.93 per cent after it acquired an 11 per cent stake worth $US2 billion ($A2.8 billion) in US electric-truck maker Nikola Corp.

The truck maker’s shares surged 40.79 per cent.

Declining issues outnumbered advancing ones on the NYSE by a 3.78-to-1 ratio; on Nasdaq, a 2.22-to-1 ratio favoured decliners.

The S&P 500 posted no new 52-week highs and 2 new lows; the Nasdaq Composite recorded 31 new highs and 49 new lows.

Volume on US exchanges was 10.48 billion shares compared with the 9.32 billion average for the full session over the last 20 trading days.