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Stocks log worst day since June on Fed jitters, S&P ends below 1700

Stocks closed near session lows Tuesday, with major averages logging their biggest declines since June, after two Federal Reserve Presidents said the central bank could begin tapering its easy-money program as early as September.

"This week has been pretty slow so far, but whenever that word 'taper' is put out there, it scares the market," said Joe Bell, senior equities analyst with Schaeffer's Investment Research.

(Read more: After-hours buzz: Disney, First Solar, 21st Century Fox & More)

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The Dow Jones Industrial Average tumbled 93.39 points to finish at 15,518.74, dragged by IBM and Hewlett-Packard.

The S&P 500 dropped 9.77 points to close at 1,697.37, dipping below its 1,700-mark. The Nasdaq fell 27.18 points to end at 3,665.77, snapping a five-day win streak. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended above 12.

All key S&P sectors closed in the red, led by materials and financials.

"You stay away from a dull market [because] there's very little money to be made," said Art Cashin, director of floor operations at UBS Financial Services. "You look for opportunity or news changes, so you need some volatility to inspire a little extra volume."

Atlanta Fed president Dennis Lockhart said the initial taper in the central bank's asset purchase program could start at any of the three remaining Federal Open Market Committee meetings this year. Lockhart added he was not disappointed by the July unemployment report and said he'll be watching data closely for "the next few weeks" to see if the economy is on track for faster growth.

Chicago Fed President Charles Evans also echoed Lockhart's earlier comments, saying the central bank will likely reduce its stimulus program later this year. Evans is typically among the most dovish policymakers.

(Read more: Fed outlier! No taper before year-end: Strategist)

Meanwhile, the government auctioned $32 billion in 3-year notes at a high yield of 0.631 percent. The bid-to-cover ratio, an indicator of demand, was 3.21, versus a recent average of 3.44.

Among earnings, Michael Kors rallied after the luxury retailer posted earnings that nearly doubled, thanks to gains in Europe and roll-out of shops within department stores. And Fossil surged to lead the S&P 500 gainers after the fashion accessory maker posted better-than-expected earnings and lifted its full-year outlook.

Meanwhile, American Eagle Outfitters tumbled after the teen apparel retailer said its second-quarter profit will likely be less than half of what Wall Street was expecting, citing weak sales and lower margins. Rivals Abercrombie & Fitch and Aeropostale also declined.

Disney, 21st Century Fox, Zillow and Office Max are among notable companies slated to post results after the closing bell.

So far, nearly 85 percent of S&P 500 companies have reported results this quarter, with 67 percent of companies topping earnings expectations and 55 percent beating revenue forecasts, according to the latest data from Thomson Reuters. If all remaining companies report earnings in line with estimates, earnings will be up 4.3 percent from last year's second quarter.

Bank of America traded lower after the U.S. Justice Department said it had filed a civil lawsuit against the financial giant for what government lawyers said was a fraud on investors involving $850 million of residential mortgage-backed securities.

Washington Post soared after Amazon.com founder Jeff Bezos agreed to buy the publishing company's newspaper assets for $250 million.

IBM slipped after Credit Suisse downgraded the tech giant to "underperform" from "neutral" and cut its price target on the Dow component to $175 from $200, saying organic growth would be challenging in the future.

On the economic front, the U.S. trade deficit fell 22.4 percent to $34.2 billion in June, narrowing to its lowest level in more than 3-1/2 years, according to the Commerce Department. Economists polled by Reuters had expected the trade deficit to narrow to $43.5 billion.

In Europe, shares closed in the red even after reports that showed German industry orders beat forecasts in June to record their biggest rise since October and British manufacturing grew much more strongly than expected.

The positive economic news pushed gold prices to a 2-1/2 week low to below $1,300 an ounce. Most gold miners including Yamana Gold and Iamgold tumbled sharply.

Meanwhile Japan's benchmark index reversing earlier losses to rally 1 percent as the yen weakened, while the rest of Asian stocks were mixed in choppy trade.

Australia's benchmark index was little changed after the Reserve Bank of Australia cut interest rates by 25 basis points to a record low of 2.5 percent, as widely expected. It marks the eighth rate cut since November 2011 when the central bank first acknowledged a growth slowdown as the country's decade-long mining boom began to fade.

—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)

Coming Up This Week:

WEDNESDAY: Mortgage applications, Gallup US job creation index, oil inventories, Fed's Plosser speaks, 10-yr note auction, Fed's Pianalto speaks, consumer credit; Earnings from Duke Energy, Ralph Lauren, Time Warner, Wendy's, AOL, Green Mountain Coffee Roasters, Groupon, Mondelez Int'l, Tesla Motors, Transocean
THURSDAY: Jobless claims, natural gas inventories, Fed balance sheet/money supply, chain store sales; Earnings from Rio Tinto, Dean Foods, T-Mobile, Lions Gate Entertainment, Nvidia, Priceline.com, Annie's
FRIDAY: Wholesale trade

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