US stocks fell Thursday as continued concern about the US budget impasse, underscored by a dire Treasury report, and weak US services sector data offset other upbeat economic data.

About 55 minutes into trade, the Dow Jones Industrial Average tumbled 121.41 points (0.80 percent) to 15,011,73.

The broad-based S&P 500 gave up 14.71 (0.87 percent) at 1,679.16, while the tech-rich Nasdaq Composite Index dropped 32.85 (0.86 percent) to 3,782.16.

The indices initially opened essentially flat, but soon turned negative, especially after a September report from the Institute for Supply Management and a report issued by the US Treasury.

The ISM reading on non-manufacturing activity fell to 54.4 percent in September, down 4.2 points from August.

The US Treasury Department released a report that warned that a US default on its obligations forced by Congress not raising the country's borrowing ceiling would have catastrophic consequences.

"In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth," the report said.

As the budget debate dragged on, pushing the partial government shutdown into a third day, analysts increasingly fear it will lead to a battle over an October 17 deadline to raise the US debt ceiling. Failure to do so would force the US to default for the first time in its history.

Earlier, markets weighed a strong reading on Chinese manufacturing activity and a 27-month high in a widely watched index of European economic activity. US jobless claims for unemployment insurance rose to 308,000 last week, well below the forecast of 315,000.

Dow component United Technologies lost 1.4 percent after the defense contractor warned that it could be forced to furlough thousands of workers due to the US government shutdown.

US shares of British oil giant BP advanced 1.2 percent after a US appeals court ruled in favor of a BP challenge to a court ruling ordering settlement payments related to the 2010 Deepwater Horizon oil spill.

Pharmaceutical giant Eli Lilly sank 4.0 percent after the company said it will return to revenue growth and expanding margins after 2014. At an investor presentation, the company reaffirmed its near-term financial benchmarks and promised $5 billion in additional share repurchases "over time."

Beverage distributor Constellation Brands advanced 1.9 percent after earnings of 96 cents per share bested expectations by 8 cents and the company said its integration of recent acquisitions was on track.

Bond prices were unchanged from Wednesday. The yield on the 10-year US Treasury was 2.63 percent, while the 30-year remained at 3.71 percent. Prices and yields move inversely.