House Speaker John Boehner, R-Ohio, canceled a vote on his "Plan B" budget proposal after it failed to muster enough support among Republicans.
Announcing there would be a Plan B vote Thursday sent stocks higher but investors retreated Friday after House members were sent home with no budget agreement in place --10 days before a mandated set of spending cuts and tax increases were due to kick in.
The Dow Jones industrial average lost 120.88 points or 0.91 percent to 13,190.84 in trading Friday.
The Nasdaq lost 29.38 points or 0.96 percent to 3,021.01.
The Standard & Poor's 500 shed 13.54 points or 0.94 percent to 1,430.15.
On the New York Stock Exchange, there were 998 advancers and 2,042 decliners on composite volume of 4.78 billion shares.
The 10-year treasury note was up 9/32 to yield 1.772 percent.
Against the yen, the dollar was lower at 84.24 from Thursday's 84.39. The euro fell to $1.3189 from $1.3243.
In Tokyo, the Nikkei lost 99.27 points, or 0.99 percent, closing at 9,940.06.
In London, the FTSE 100 index shed 0.31 percent, 18.35 points, to 5,939.99.