The S&P/TSX composite index lost 69.62 points to 12,169.74 and the TSX Venture Exchange fell 12.9 points to 1,208.
The Canadian dollar was down 0.13 of a cent to 100.51 cents US.
U.S. indexes also closed in the red as the end-of-year deadline approaches for averting the "fiscal cliff," a combination of tax increases and across-the-board spending cuts set to automatically take place at the first of the year if there's no compromise agreement.
The shock of seeing the drastic fiscal measures go into effect in January would cut economic growth and likely push the U.S. back into recession.
The Dow Jones industrials closed down 59.98 points to 12,965.6 as a Republican proposal indicated both sides are very far apart.
It involves increasing the eligibility age for Medicare and to lower cost-of-living hikes in Social Security benefits.
The move is a response to Obama’s offer last week to hike taxes by US$1.6 trillion over the coming decade but to exempt Medicare and Social Security from cuts to beneficiaries.
The GOP plan also proposes to raise $800 billion in higher tax revenue over the decade but would keep the Bush-era tax cuts, including those for wealthier earners being targeted for a rise by Obama, in place for now.
The Nasdaq composite index declined 8.04 points to 3,002.2 and the S&P 500 index was down 6.72 points to 1,409.46.
"I think there is no doubt there is some concern and anxiety," said Fred Ketchen, manager of equity trading at Scotia Capital.
"What you’re playing with is confidence. You have this push-pull situation with confidence (and) confidence for those who have it is more hopeful than real, I think, at the present time."
Markets had started the session in a more positive mood after the HSBC’s Purchasing Managers' Index for the world’s second-biggest economy rose to 50.5 in November from October’s 49.5. Any reading above 50 indicates activity is expanding. It was the first time in 13 months that China’s manufacturing sector emerged from contraction.
Growth in China is particularly welcome since so many other countries are faltering to one degree or another. China is just starting to revive after the government took steps to slow the economy in order to reduce high inflation.
But signs emerged that uncertainty over whether the U.S. can avoid a major fiscal crisis could be already affecting the U.S. economy as the Institute for Supply Management index for November came in at 49.5. That was the lowest level since July 2009 and down from 51.7 in October.
The gold sector led decliners, down about two per cent while bullion gained $8.40 to US$1,721.10 an ounce. Goldcorp Inc. (TSX:G) faded $1.42 to C$37.29 while Barrick Gold Corp. (TSX:ABX) declined 90 cents to $33.59.
The industrials sector was off almost one per cent as Canadian Pacific Railway Ltd. (TSX:CP) set aside plans to build a 420-kilometre extension to serve coal mines in the Powder River Basin, which underlies parts of Montana and Wyoming. CP will take a $180-million non-cash charge on its books as a result of a decision to defer the plan indefinitely because of a deterioration in the market for thermal coal, which is primarily burned to produce power. Its shares were down $1.35 to $91.35. Elsewhere in the sector, Canadian National Railways (TSX:CNR) moved down 57 cents to $88.77.
The base metals sector was off 0.5 per cent while copper prices found limited lift from the Chinese data with the March contract ahead a penny at US$3.66 a pound. China is the world's biggest consumer of the metal, which is viewed as a proxy for the global economy as it is used in so many applications. Thompson Creek Metals (TSX:TCM) shed six cents to C$2.88 while Taseko Mines (TSX:TCO) inched up three cents to $2.81.
The financials group shed 0.33 per cent as Bank of Montreal (TSX:BMO) gave back 38 cents to $59.29 a day before the bank releases its latest earnings.
Techs were weak with Celestica Inc. (TSX:CLS) 11 cents lower to $7.24.
Research in Motion Ltd. (TSX:RIM) was down four cents to $11.55 as its stock was downgraded to sell from hold at Canaccord. The firm cited RIM’s recent share strength and doubts that the new BB10 lineup, which is being launched at the end of January, can turn around its long-term business trends.
The energy sector was down 0.33 per cent while the January crude contract on the New York Mercantile Exchange up 18 cents to US$89.09 a barrel. Canadian Natural Resources (TSX:CNQ) slipped 40 cents to $28.19.
Husky Energy Inc. (TSX:HSE) added 12 cents to C$28 as it said it has set a 2013 capital budget of $4.8 billion, a modest increase from the $4.7 billion it expects to spend this year. The energy company also aims to substantially increase production in the coming years.
The consumer staples sector was one of two advancers, up 0.87 per cent as dairy and grocery products company Saputo(TSX:SAP) made a major acquisition. The Montreal-based company is paying $1.45 billion to buy Morningstar Foods, a 2,000-employee company that makes dairy and non-dairy products for the U.S. market.
Saputo has said it plans to expand in the United States but has downplayed speculation it might acquire Hostess, the bankrupt company that makes Twinkies snack cakes. Saputo shares gained $1.37 or 2.98 per cent to $47.41.