Stocks sold off late in the session on Tuesday, led by a slide in Microsoft shares, though retailers were a notable bright spot after Home Depot raised its outlook.

Microsoft Corp was the most actively traded on Nasdaq, weighing on the tech-heavy Nasdaq Composite after the surprising departure of a key executive. The stock fell 3.2 percent to $27.09.

After the closing bell, Cisco Systems shares rose 6.8 percent to $18 after it reported quarterly revenue and earnings that beat analysts' estimates.

Home Depot shares hit during the regular session levels not seen since April 2000 and the company's raised outlook suggested a revival in the long-dormant U.S. housing market. The S&P retail sector index advanced 1 percent.

"Home Depot did say something about housing, which was perceived as positive and was behind the earlier rally," said Richard Sichel, chief investment officer at Philadelphia Trust Co.

"That was tempered by Microsoft, to some extent, and probably more so by the 'fiscal cliff,'" he said.

The S&P 500 is down 2.7 percent so far this month and closed below its 200-day moving average for a fourth day in a row, a technical indicator that suggests the recent declines could gain momentum. The moving average is currently at 1,381.58, and failure to rise above that level suggests market weakness.

Concerns about the looming "fiscal cliff" kept investor activity subdued as lawmakers returned to Washington after the November 6 election, when President Barack Obama won a second term while Democrats added to their margin in the U.S. Senate and picked up seats in the House of Representatives.

The market is grappling with how a divided U.S. Congress will deal with the series of mandated tax hikes and spending cuts that start to take effect next year and could take the world's largest economy back into recession. However, serious negotiations are still weeks away, analysts said.

The Dow Jones industrial average fell 58.90 points, or 0.46 percent, to 12,756.18 at the close. The S&P 500 dropped 5.50 points, or 0.40 percent, to 1,374.53. The Nasdaq Composite lost 20.37 points, or 0.70 percent, to 2,883.89.

Dow component Home Depot Inc raised its full-year outlook even before accounting for any future lift in sales in the aftermath of super storm Sandy, as the retailer benefited from a recent uptick in the U.S. housing market. Home Depot's stock rose 3.6 percent to $63.38, its highest close in more than 12 years.

TJX Cos , which owns the Marshalls and T.J. Maxx retail chains, reported results that beat analysts' forecasts and its shares added 2.7 percent to $42.06.

Microsoft shares fell after Steve Sinofsky, head of the Windows unit, left the company. Sinofsky was considered the driving force behind Windows, the company's biggest product.

Technology shares led the market's decline, with an S&P technology index down 0.8 percent.

AK Steel Holding shares fell 17.6 percent to $4.50 after the company forecast a fourth-quarter loss.

Just over 6.2 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, below the daily average during November last year of 7.33 billion shares.

More than two issues fell for every one that rose on both the NYSE and the Nasdaq.

(Reporting by Rodrigo Campos; Editing by Jan Paschal)