The Dow Jones industrial average fell 19 points in midday trading, or 0.2 percent, to 12,361. The Standard & Poor's 500 index fell 1, or 0.1 percent, to 1,316. The Nasdaq composite fell 10, or 0.4 percent, to 2,749.
Oil rose above $98 per barrel, sending energy stocks higher, after major investment banks raised their forecasts for crude prices.
Goldman Sachs, J.P. Morgan and Morgan Stanley predicted a rise in oil prices later this year as global demand rises. Goldman predicted oil prices would reach $135 a barrel by the end of 2012.
Energy companies in the S&P 500 rose 1.8 percent, the most of the ten industry groups in the index.
Markets faced more troubling news about Europe's debt crisis, a day after stocks and commodities took a steep dive on news of a defeat of Spain's ruling party over the weekend and a warning from S&P on Italy's debt.
Greece's main opposition party said it opposed the government's new austerity measures. The news dashed hopes that the country might be able to repair its finances enough to get another loan package quickly from the International Monetary Fund.
Ratings agency Moody's warned that a restructuring of Greece's debt would be considered a default and would hurt the credit ratings of Greece and other debt-laden European countries. Moody's also said it would review 14 British financial institutions for a possible downgrade.
Uri Landesman, president of hedge fund manager Platinum Partners, said a Greek debt default could start a chain reaction that could spread to much larger economies like Spain, wreaking havoc on the global economy. Spain is the fourth-largest economy in Europe and one of the ten largest in the world.
"If you had a Spanish default, there wouldn't be a single world bank not affected," Landesman said.
European stocks managed to recover after Monday's declines, in part because of a reassuring report from Germany that said business optimism was holding steady.
Germany's DAX and England's FTSE 100 each rose 0.4 percent. France's CAC-40 rose 0.3 percent. The euro also rose slightly against the dollar after falling to a two-month low Monday.
The U.S. Commerce Department reported that more Americans bought new homes in April, but at a pace far below what would be normal in a healthy housing market. New home sales rose to an annual rate of 323,000 from 300,000 in March. An annual rate of 700,000 is considered normal.
New homes are unappealing to budget-conscious families because their median price is nearly 31 percent higher than previously-occupied homes. That's twice the price difference typical of a healthy economy. At their current rate, new-home sales are on track to experience a sixth straight year of declines.
Fewer new homes means fewer jobs. Each new home generates three jobs $90,000 in taxes a year, according to the National Association of Home Builders.
Energy company El Paso rose 7 percent, the most of any stock in the S&P 500, after saying it plans to divide itself into two publicly-traded businesses by the end of this year.
AutoZone Inc. rose 6 percent after the specialty retailer said its earnings rose 12 percent on strong sales of its Duralast auto parts.
Stanley Black & Decker Inc. fell 2 percent after law firm Goldfarb Branham LLP announced they were investigating the company's board of directors over questions about CEO compensation.
Medtronic Inc. fell 3 percent after its earnings fell short of forecasts.
Trading was light. May is typically a slow month for stocks.