Stocks fell on Monday but staged a late comeback after fears of a looming Greek debt default diminished on news of a possible deal to advance new bailout funds to Greece.

Stocks spent most the session sharply lower after European leaders disappointed investors by failing to come up with any new solutions to the euro zone's sovereign debt crisis over the weekend.

However, a Greek finance ministry official said after talks on Monday with the European Union and International Monetary Fund that the country was near an agreement with international lenders to continue receiving money.

For the time being it looks as though there is hope the conversation is going to take on a more positive and constructive tone, said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.

A little reason for a little buoyancy in the market, but we've seen this before.

Energy and financial stocks were among the worst performers of the session. The PHLX oil service sector index <.OSX> dropped 1.7 percent as oil prices settled down 2.6 percent to $85.70 on demand worries.

The KBW bank index <.BKX> fell 2.8 percent following a steep decline in European banks on worries euro zone leaders won't be able to prevent debt-stricken Greece from sliding into default. Citigroup Inc slipped 4.4 percent to $27.71.

International lenders told Greece on Monday it must shrink its public sector and improve tax collection to avoid default within weeks as investors, unnerved by political setbacks in Europe dumped risky euro zone assets.

The Federal Reserve will begin a two-day meeting on Tuesday and is poised to increase downward pressure on longer-term interest rates this week in a bid to accelerate a sputtering U.S. recovery.

It's the Greece thing and the Fed meeting this week. We've seen a lot of write-up on this Operation Twist, a lot of it may be baked in, said Terry Morris, senior equity manager for National Penn Investors Trust Company in Reading, Pennsylvania.

The Dow Jones industrial average <.DJI> dropped 108.08 points, or 0.94 percent, to 11,401.01. The Standard & Poor's 500 Index <.SPX> lost 11.92 points, or 0.98 percent, to 1,204.09. The Nasdaq Composite Index <.IXIC> edged down 9.48 points, or 0.36 percent, to 2,612.83.

In the twist operation, traders expect the Fed to try to stimulate growth by pushing down longer-term debt yields by buying bonds and selling short-term debt. A Fed statement is expected on Wednesday at the end of the meetings.

Doubts about U.S. fiscal policy were also spoiling the appetite for stocks. President Barack Obama laid out a $3 trillion plan to cut U.S. deficits by raising taxes on the rich, but Republicans mocked it as a political stunt, signaling the proposal has little chance of becoming law.

Apple Inc helped curb declines on the Nasdaq as shares hit an all-time high of $413.23 earlier before closing up 2.8 percent to $411.63. An analyst said the stock had broken through technical levels, and Morgan Stanley included the iPad maker in a list of companies capable of increasing or initiating dividends.

Caterpillar Inc was one of the worst performers on the Dow, off 1.5 to $84.60 after Raymond James cut its rating on the world's largest construction equipment maker, citing slowing global economic growth.

Volume was light, with about 7.11 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, slightly below the daily average of 7.9 billion.

Declining stocks outnumbered advancing ones on the NYSE by 2,310 to 667, while on the Nasdaq, decliners beat advancers 2,030 to 552.

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)