Oil prices plunged nearly 3 percent to settle at $94.45 a barrel, logging its biggest one-day decline since November. Energy companies including Phillips 66, Tesoro and Marathon Petroleum were among the top laggards on the S&P 500.
On the economic front, the rate of growth in the services sector slowed in March to the lowest level since August. The Institute for Supply Management said its services index fell to 54.4 last month from 56 in February, falling short of economists' forecasts for 55.8. A reading above 50 indicates a sector expansion.
U.S. private employers added 158,000 jobs in March, falling short of economists' expectations for a gain of 200,000, according to payrolls processor ADP. February's private payrolls figure was revised up to an increase of 237,000 from the previously reported 198,000.
The ADP report comes ahead of the widely-followed government non-farm payrolls report, due Friday. Economists expect to see a gain of 200,000, with the unemployment rate steady at 7.7 percent, according to a Reuters poll.
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European markets were lower as Italy's political impasse continues and President Giorgio Napolitano's team of "wise men" attempted to formulate reform measures that can gain cross-party consensus.
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Vodafone slumped after Verizon Communications denied earlier reports that it is looking to partner with AT&T to acquire British cellphone company Vodafone. However, the Dow component said it would be a willing buyer of Vodafone's current 45-percent share of Verizon's wireless venture.
Zynga soared after the social gaming company said it would begin offering real-money poker and casino-style games in the UK in the next few days.
Among earnings, ConAgra declined after the packaged foods company reported a 57 percent drop in earnings, hurt by costs related to its acquisition of Ralcorp.
Meanwhile, Monsanto gained after the seed company boosted its full-year profit guidance after reporting better-than-expected quarterly results thanks to strength in its global corn business.
Earlier, the Mortgage Bankers Association reported that home loan applications dipped 4 percent last week due mainly to a decline in refinancing.
Meanwhile, the Nikkei 225 surged 3 percent on hopes that aggressive monetary stimulus measures will be announced at the Bank of Japan's policy meeting on Thursday. Central bank governor Haruhiko Kuroda is expected to substantially boost asset purchases,as well as buy longer-dated government bonds and commit to the open-ended purchase of assets.