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Stocks end near lows, Dow skids over 150 as Syria fears escalate; Vix spikes 12%

Stocks finished sharply lower for a second session Tuesday, with the Dow falling to a two-month low, amid escalating worries over potential U.S. military action in Syria.

Defense Secretary Chuck Hagel told the BBC the U.S. military is "ready to go" if President Barack Obama orders action over a chemical weapons attack in Syria.

Meanwhile, NBC News reported the U.S. could launch a missile strike against Syria "as early as Thursday."

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The Dow Jones Industrial Average fell 170.33 points, or 1.14 percent, to finish at 14,776.13, dragged by Bank of America and Microsoft. The blue-chip index posted its 13th decline this month, the most number of drops in a month since July 2012.

The S&P 500 dropped 26.30 points, or 1.59 percent, to end at 1,630.48. And the Nasdaq slumped 79.05 points, or 2.16 percent, to close at 3,578.52. Both indexes posted their worst day in two months.

The Dow and S&P 500 are on track for their biggest monthly declines since May 2012.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, spiked near 17.

All key S&P sectors closed in the red, dragged by techs and financials.

Art Cashin, director of floor operations at UBS Financial Services said he is worried about the situation in Syria, calling it "another wide-open variable."

"I know some people are dismissing it as an excuse for a market that was looking to go down, but I think if you look at things like the spread between Brent and West Texas beginning to spread out, that tells you there is some real concern," he said.

(Read more: Cramer: This is the 'go-to' sector, despite Syria)

Oil prices settled above $109 a barrel, its best one-day gain of the year, amid worries that potential military action in the Middle East could disrupt oil production.

And Treasury prices gained. The benchmark 10-year Treasury yield eased to to 2.76 percent from 2.79 percent late Monday. Separately, the Treasury auctioned $24 billion in 2-year notes at a high yield of 0.386 percent. The bid-to-cover ratio, an indicator of demand, was 3.21, versus a recent average of 3.48.

Gold prices rallied to a 15-week high as the geopolitical tension sparked a flight to safer investments. European stocks suffered their biggest daily drop in two months.

On Monday, U.S. Secretary of State John Kerry said he believed Syria had used chemical weapons on its own people, and that the Syrian government must be held to account.

"I think [the Fed] desperately would love to taper but it's going to be difficult at this point for Mr. Bernanke to keep a straight face and say that this is a data-driven decision," said Cashin. "So far, the data's been lousy and unless he gets a miracle with the non-farm payrolls, I think it's going to be tough to justify tapering."

(Read more: Get ready for a'massive interest rate shock' soon)

Patrick Kernan of Cardinal Capital who trades S&P 500 options said the CBOE pit has been busier Tuesday than in recent sessions.

"But it is by no means crazy," he said. "Customers were buying short-dated options this morning and as the day progressed, people have been buying longer-dated options, to the end of the year. They've been moving their volatility buys further out."

Investors seem to be protecting more against a downside move, he said.

JCPenney slumped after Pershing Square's Bill Ackman sold his entire 18-percent stake in the retailer, totaling nearly 39 million shares. Ackman quit the board two weeks ago amid clashes with the company and other directors over strategy.

BlackBerry is considering spinning off BlackBerry Messenger into a subsidiary called BBM, according to a report from Dow Jones, citing sources familiar with the matter.

Among earnings, Tiffany raised its earnings forecast for the year as robust sales in China and higher prices helped offset weak business in the U.S. Still, shares of the upscale jewelry retailer finished lower, along with the broader market.

TiVo is scheduled to post earnings after the closing bell.

On the economic front, home prices gained 0.9 percent in June on a seasonally-adjusted basis, according to the S&P/Case Shiller composite index. On a non-adjusted basis, prices rose 2.2 percent. Compared to a year earlier, prices were up 12.1 percent, in line with economists' expectations.

(Read more: As investors shift,housing is the new stock market)

And consumer confidence gained to 81.5 in August, according to the Conference Board, topping expectations for 79.1.

Monday's weaker-than-expected manufacturing data boosted hopes for a later start to the scaling back of Federal Reserve asset purchases.

(Read more: US durable goods plunge in July, cash shadow over Q3)

"Recent data releases are consistent with the U.S. economy still remaining in a soft patch in early third quarter. However, it only marginally argues against the Fed tapering quantitative easing in September," said Bank of Tokyo-Mitsubishi's Lee Hardman in a research note.

(Read more: Insider says Summers may be named Fed chief soon)

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

Coming Up This Week:

WEDNESDAY: MBA mortgage applications, pending home sales index, oil inventories, 5-yr note auction; Brown-Forman, Joy Global, Chico's, Williams-Sonoma
THURSDAY: GDP, jobless claims, corporate profits, natural gas inventories, 7-yr note auction, Fed's Lacker speaks, Fed's balance sheet/money supply, Fed's Bullard speaks, AMR hearing, weekly rail numbers; Earnings from Campbell Soup, Pall, Salesforce.com, Splunk, Krispy Kreme
FRIDAY: Personal income & outlays, Fed's Bullard speaks, Chicago PMI, consumer sentiment, farm prices

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