Stocks close sharply lower as bulls fail to hold market milestones

U.S. stocks closed about 1 percent lower on Tuesday as investors eyed higher bond yields, mixed domestic data and renewed concerns over Greece.

"We had a bad trade number this morning, (indicating) first quarter GDP actually negative," said David Kelly, chief global strategist at J.P. Morgan Funds. "That might be part of the story."

The major averages failed to hold above psychologically key levels and closed below their 50-day moving averages. The Dow Jones industrial average closed below 18,000, off 142 points after an earlier decline of more than 150 points.

The Nasdaq underperformed, falling about 1.5 percent to close below 5,000. The iShares Nasdaq Biotechnology ETF (IBB) fell more than 2 percent. Apple was the worst-performing blue chip, while other tech giants Microsoft and Google also declined sharply. The S&P 500 failed to stay above the key 2,100 level.

The Russell 2000 fell more than 1.5 percent to below its 50-day moving average. The Russell gave back recent gains to trade near last Thursday's lows and up less than 1 percent for the year. Earlier in the year, the index of small-cap, domestically-focused firms had hit records with the strengthening dollar.

The Dow transports closed down 1.5 percent, with oil settling above $60 a barrel for the first time since December 2014.

European equities closed sharply lower on Tuesday as investors weighed Greece news despite good earnings from banking giants HSBC and UBS.

In the continuing Greek debt drama, stocks and bonds sold off in Athens on news the International Monetary Fund may cut a funding lifeline to Greece unless its European partners accept more debt writedowns, the Financial Times reported. Germany's finance minister later rebuffed the report.

"The halo effect of a weaker Europe based on Greece chatter is hard to recover from," said Art Hogan, chief market strategist at Wunderlich Securities.

He noted that besides the continued selloff in biotechs, security software stocks such as FireEye and Palo Alto declined after Qualys gave weak guidance on Monday.

Nick Raich, CEO of The Earnings Scout, noted weakening earnings trends in biotech and technology stocks from the strong dollar and a slowdown in global growth, particularly in China.

"A lot of people are bullish but the market has not reset to lower growth," he said, noting the morning's large trade deficit report "was a trigger for some of the selling we had today."

Read MoreInvestors flee US stocks at financial-crisis levels

The March trade deficit came in at $51.4 billion, above expectations and the largest since 2008 as imports surged. February's figure was increased slightly to $35.9 billion from $35.4 billion.

"Bottom line, notwithstanding the smoothing which puts the deficit at a level not much different than the two prior quarters, first quarter GDP estimates will have to be revised lower, possibly sharply," Peter Boockvar, chief market analyst at The Lindsey Group, said in a note.

Economists on average now believe that the U.S. economy contracted slightly in the first quarter, according to a Moody's/CNBC survey.

Still, in a relatively quiet period at the tail end of earnings season and ahead of Friday's important employment report, J.P. Morgan's Kelly said "overall the fundamentals still support the market going up further."

"I think the market is stuck in this trading range," said Peter Cardillo, chief market economist at Rockwell Global Capital. "Just in a waiting mode due to employment (data) on Friday."

Paul Nolte, portfolio manager at Kingsview Asset Management, looked beyond Tuesday's selloff in stocks to whether or not Friday's report shows wage gains.

"Really, until we prove otherwise, I'm going to look at this as a pause in the market rather than a correction," he said.

Data for the second quarter has been more encouraging. April's non-manufacturing ISM hit a five-month high, coming in at 57.8 versus the expected 56.3 and March's 56.5.

"I think the ISM numbers maybe give us a preview of what to expect (from nonfarm payrolls)," JJ Kinahan, chief strategist at TD Ameritrade said earlier. "Everything until Friday is just a bit of background noise."

The pace of expansion in the U.S. services sector eased from a seven-month high in April on a dip in new business growth, but hiring in the sector accelerated to its highest since June, Financial firm Markit said.

Longer-term bond yields extended gains after the economic reports, with the U.S. 10-year Treasury yield hitting a high of 2.22 percent for the first time since March 10. The gains followed the German 10-year bund yield, which climbed to 0.51 percent. The U.S. dollar traded flat against major world currencies, with the euro near $1.11.

Read MoreThe list of big money bond market bashers is growing

"At this point the market has begun to be fairly confident that the Fed is going to raise rates in the next three to five meetings," said Jeffery Elswick, director of fixed income at Frost Investment Advisors. "At some points yields need to reprice somewhat higher. The bottom line is the market has become accustomed to pretty poor first quarter growth numbers. As we head into the second quarter I think the market is confident enough in that the Fed can raise rates."

Elswick expects the Fed to increase short-term interest rates in the second half of the year, possibly in July or October when no press conference is scheduled.

"Rising interest rates should be a major headwind for stocks under the headwind of slow growth," Boockvar said. "I'm surprised the market is not down more, to be honest."

5-day performance for US 10-year Treasury yield

Despite a near 30 basis point jump in the 10-year Treasury note yield in the last week, Tuesday's level held around the 50-day moving average.

"We're still in a wait-and-see mode," Hogan said. If the data is good, "I think the market does like that because I think you'd be hard pressed to find enough data that will shift a rate hike back into June. We're in a zone where good news is good news."

Earnings season continues, with morning reports from Disney, Estee Lauder, Kellogg, Sprint, Towers Watson, Bloomin' Brands and Zoetis.

Read MoreEarly movers: MDLZ, TSLA, ODP, BLMN & more

Walt Disney closed mildly lower after jumping to an all-time high on quarterly earnings and revenue that topped analysts' expectations on Tuesday.

Salesforce closed up 1.61 percent. Earlier, its shares were briefly halted after spiking more than 5 percent on a Bloomberg report that Microsoft was evaluating a bid for the company.

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Electronic Arts, LendingClub, News Corp, Groupon, Herbalife, Newfield Exploration, SolarCity and Weight Watchers were all due after the bell.

The Dow Jones industrial average closed down 142.20 points, or 0.79 percent, at 17,928.20, with Apple the greatest laggard and Visa the only gainer.

The S&P 500 closed down 25.02 points, or 1.18 percent, at 2,089.47, with utilities leading all 10 sectors lower.

The Nasdaq closed down 77.60 points, or 1.55 percent, at 4,939.33.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.

For every four decliners about one advanced, with an exchange volume of about 793 million and a composite volume of nearly 3.8 billion in the close.

Crude oil futures for June delivery settled at $60.40 a barrel, the highest since December, on the New York Mercantile Exchange. Gold futures settled up $6.40 at $1,193.20 an ounce.

Read MoreOil at $60, get ready for 'frack counterattack'

UBS shares surged 5 percent after the banking group reported profit for the first quarter that was nearly double that posted in the same period last year.

HSBC shares declined sharply despite reporting a better-than-expected rise in pre-tax profits for the first quarter of the year, to $7.06 billion, after its investment banking division had a more profitable three months than forecast.

Chinese shares plummeted amid reports of brokerages raising margin requirements and news that the Reserve Bank of Australia cut interest rates for the second time this year.

Reuters contributed to this report.

On tap this week:

Tuesday

Earnings: Agrium, Allstate, CenturyLink, Devon Energy, Electronic Arts, Fossil, News Corp., Groupon, Herbalife, Noodles & Co., SolarCity, Wageworks, Weight Watchers, Zulily

8:00 p.m.: Minneapolis Fed President Narayana Kocherlakota

Wednesday

Earnings: Tesla Motors, Marathon Oil, Sunoco Logistics, Transocean, TripAdvisor, A-B InBev, GlaxoSmithKline, Occidental Petroleum, Chesapeake Energy, HollyFrontier, Motorola Solutions, 3D Systems, SodaStream, Wendy's, Activision Blizzard, 21st Century Fox, Keurig Green Mountain, WholeFoods, Rayonier , WebMd

7:30 a.m.: Mortgage applications

8:15 a.m.: ADP private payrolls

8:30 a.m.: Productivity and costs

9:15 a.m.: Fed Chair Janet Yellen and IMF MD Christine Lagarde on panel

10:30 a.m.: DOE oil, gasoline inventories

1:15 p.m.: Kansas City Fed's Esther George on credit markets panel

1:30 p.m.: Atlanta Fed Dennis Lockhart on monetary policy

Thursday

Earnings: Alibaba, Orbiz, Time Inc, CBS, Monster Beverage, Zynga, Fortress Investment, SeaWorld, Regeneron, Siemens, Apache, ArcelorMittal, BTGroup, ING Group, Alcatel-Lucent, Norwegian Cruise Line, Nuance Communications, Nvidia, Molson Coors, Apollo Global Management, Elizabeth Arden, Cyber ArkSoftware, Tesoro, Teradata

8:30 a.m.: Weekly jobless claims

8:30 a.m.: PPI

Friday

Earnings: Toyota, JD.com, BioCryst Pharma, Liberty Media, AOL, Health Care Reit, NRG Energy, Sirona Dental Systems

8:30 a.m.: Employment report

10:00 a.m.: Wholesale trade

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