Stocks staged a sharp recovery in the final hour of trading Thursday following news that the House of Representatives will reconvene on Sunday evening to resume talks, with less than a week left until the "fiscal cliff" deadline.
The House of Representatives will meet on Sunday evening at 6:30 pm, according to GOP aides.
"Moves are always exacerbated during low-volume days and we'll continue to react to every headline from Washington," said Keith Bliss, senior vice president at Cutton & Co. "But I still think the overall market is in a bullish sentiment by the way that the technical are lining up. It might be prudent to keep some powder dry and buy on these dips."
The S&P 500 dipped 1.73 points, or 0.12 percent, to finish at 1,418.10. The Nasdaq erased 4.25 points, or 0.14 percent, to close at 2,985.91. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, turned lower after rising above 20 earlier for the first time in nearly five months.
Among key S&P sectors, materials and financials held small losses, while consumer staples turned higher.
Earlier, stocks tumbled more than 1 percent following Senate Majority Leader Harry Reid's comment that a budget deal may not be reached by the end of the year.
"It looks like that's where we're headed," Reid said of the looming fiscal cliff and pointed fingers at House Speaker John Boehner of running a "dictatorship" by "not allowing the vast majority of the House of Representatives to get what they want."
Obama cut short his Christmas vacation in Hawaii to deal with the deadlocked talks between Democrats and Republicans on what to do with $600 billion in tax increases and automatic spending cuts, due to kick in on Jan. 1. With less than a week remaining this year, time is now running out and the pressure on politicians to find a solution is building, as U.S. Treasury Secretary Timothy Geithner warned the U.S. will hit the debt ceiling on Monday, Dec. 31.
The two sides could work towards a "mini-deal" to postpone the effects of the fiscal cliff by extending tax cuts for taxpayers with incomes below $250,000, postponing the automatic spending cuts, and extending unemployment benefits. (Read More: Only 4 Negotiating Days 'Til 'Cliff Mess')
Meanwhile on the economic front, the consumer confidence index tumbled to 65.1 in December from a downwardly revised 71.5 in November, hitting a four-month low, according to the Conference Board.
Earlier, jobless claims fell 12,000 to a seasonally adjusted 350,000 last week. Meanwhile, the four-week moving average tumbled to its lowest since March 2008.
And new home sales rose 4.4 percent in November to a seasonally adjusted 377,000-unit annual rate, the fasts pace in 2-1/2 years, according to the Commerce Department.
Marvell Technology declined after a federal grand jury ruled the chipmaker infringed two patents held by Carnegie Mellon University and ordered the company to pay $1.17 billion in damages. In addition, at least two brokerages lowered their rating on the company.
Domino's Pizza climbed after Oppenheimer raised its price target on the pizza chain to $50 from $44.
Hartford Financial Services edged higher after Stifel added the financial services company to its "select" list and raised its target price to $28 from $25.
In Europe, stocks rose in cautious trading after being closed for Christmas and Boxing Day. Meanwhile, in Asia, Japanese stocks hit a 21-month high as a weaker yen boosted export stocks. Sentiment in Asia was boosted as profits at China's factories jumped in November, helped by the recovery in the economy.