Stocks closed in the red but well off their session lows Monday, as Treasury prices rose in choppy trading following comments from some Fed policymakers that downplayed worries over the end to the central bank's bond-buying program.
"This is a pretty amazing snap back, but what we're going to have to get used to for the rest of the summer would be volatility," said Art Hogan, managing director of Lazard Capital Markets.
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Treasury prices gained in choppy trading. The benchmark 10-year note yield were just below 2.53 percent after earlier pushing around 2.66 percent.
The Dow Jones Industrial Average slumped 139.84 points, or 0.94 percent, to close at 14,659.56, dragged by Bank of America and Hewlett-Packard. Still, the blue-chip index ended off their lows after being down nearly 250 points at its session low.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended above 20.
All key S&P sectors finished in negative territory, dragged by financials and materials.
Stocks were sharply lower for most of the session amid worries the Federal Reserve's stimulus measures may be winding down and a possible cash crunch in China. The Shanghai Composite suffered its worst one-day selloff in nearly four years. And Goldman Sachs became the latest bank to downgrade China's growth outlook, saying tighter financial conditions are a downside risk for the world's second largest economy.
(Read More: China's Credit Squeeze Deals Fresh Blow to Stocks)
"We're currently in a risk off environment that has built up over the recent days," said Michael Sheldon, chief market strategist at RDM Financial Group. "Here in the U.S., it will be important to watch the economic data over the next few months—if the economy can be supported with higher interest rates, investors should return to equities. But if the economy is unable to stand on its own and the Fed still wants to take away the punch bowl, that could spell more difficulty for the equity markets."
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The U.S. greenback rallied against a basket of currencies, trading near its highest level in almost three weeks.The dollar index extended its sharp gains from last week's 2 percent rally, its biggest weekly rally since November 2011.
"The natural stopping point in the market may be the March and April lows in the 1,535-1,540 area…We could see a bit more downside as the market comes to grips that the end of the Fed stimulus program is in sight," said Sheldon. "Also, the key is to watch the bond market—the rates have increased rapidly and we need to see that settle down."
Furthermore, the Bank for International Settlements (BIS) waved a red flag for central banks over the weekend, saying it was time to end ultra-lose monetary policy. BIS—known as the central bank for central banks—said in its annual report that current monetary policy in the U.S., euro zone, U.K. and Japan will not bring about much-needed labor and product market reforms, and is a recipe for failure.
Dallas Fed President Richard Fisher said he advocates a reduction of the central bank's stimulus program but stressed this should be done gradually.
"I'm not in favor of going from wild turkey to cold turkey over night," Fisher, a voting member of the Federal Open Market Committee next year, said in a speech.
And Minneapolis Fed President Narayana Kocherlakota said markets are wrong to view the Fed as having become more hawkish in its views on the need to tighten monetary policy.
No major economic reports were scheduled for release Monday.
Meanwhile, Apple briefly dropped below $400 a share for the first time since mid-April after Jefferies cut its price target on the tech giant to $405 a share from $420 and lowered its iPhone sales estimates for the third quarter. Separately, Apple announced that it had changed the way senior executives, including CEO Tim Cook, receive stock awards.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
Coming Up This Week:
TUESDAY: Durable goods orders, FHFA home price index, S&P/Case-Shiller index, new home sales, consumer confidence, Richmond Fed mfg index, 2-yr note auction, Sprint shareholder mtg, Yahoo shareholder mtg; Earnings from Carnival, Lennar, Walgreen, Barnes & Noble, Apollo Group
WEDNESDAY: Fed's Kocherlakota speaks, MBA mortgage applications, GDP, corporate profits, oil inventories, 5-yr note auction, Microsoft Build conf.; Earnings from General Mills, Monsanto, Bed Bath & Beyond
THURSDAY: Jobless claims, personal income & outlays, pending home sales, natural gas inventories, Fed's Powell speaks, Fed's Lockhart speaks, 7-yr note auction, farm prices, Fed balance sheet/money supply, Apple e-books decision day; Earnings from ConAgra, KBHome, Nike, Accenture
FRIDAY: Fed's Stein speaks, Fed's Lacker speaks, Chicago PMI, consumer sentiment, Fed's Pianalto speaks, Fed's Williams speaks, NewsCorp splits into 2 companies; Earnings from Blackberry
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