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Stocks end near lows amid DC debt deal drama; Dow, S&P snap 4-day rally

Stocks closed sharply lower in volatile trading Tuesday, with the Dow and S&P 500 snapping their four-day rally, as ongoing worries over the impasse over the debt ceiling continued to weigh on the markets.

(Read more: After-hours buzz: Intel, Yahoo, CSX & more)

Shortly after the market close, Fitch Ratings put the U.S. government's AAA credit rating on "rating watch negative," saying that the standstill on the debt ceiling negotiations risks undermining the effectiveness of the country's government and political institutions.

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The Dow Jones Industrial Average fell 133.25 points to end at 15,168.01. Home Depot and P&G led the blue-chip laggards.

The S&P 500 slumped 12.08 points to close at 1,698.06. And the Nasdaq dropped 21.26 points to finish at 3,794.01.

Meanwhile, the Nasdaq 100 earlier gained to hit a fresh 13-year high. The index has soared nearly 22 percent this year.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped above 18.

All key S&P sectors finished in the red, dragged by consumer discretionary and utilities.

Major averages took a leg lower in the final hour of trading after Senator Dick Durbin said Senate fiscal negotiations have been suspended until House Republicans work out plan to proceed on debt limit and government funding.

"The best case solution to the current government shutdown would have been for the two parties to reach an agreement on important issues before hitting the debt ceiling deadline. Unfortunately, that appears very unlikely at this late date," according to Gary Thayer, chief macro strategist at Wells Fargo Advisors.

(Read more: New center: The US isn't as divided as it looks)

"At the other end of the spectrum, the worst-case scenario of a debt or spending default is still possible but is probably not as big a threat as many investors thought a week ago when the two parties appeared to be at an impasse," he said. "We continue to believe that the most-likely scenario is for lawmakers to agree to a modest increase in the debt ceiling that avoids default and gives lawmakers time to negotiate over political differences during the next few months."

Stocks fluctuated in a narrow range for most of the trading session amid headlines from Washington. Earlier, House GOP leaders unveiled a plan that would suspend a new tax on medical devices for two years and take away the federal government's contributions to lawmakers' and top administration officials in addition to funding the government through Jan. 15 and giving Treasury the ability to borrow normally through Feb. 7.

But Senate Majority Leader Harry Reid criticized the latest proposal, saying the House plan on financial impasse "won't pass the Senate."

(Read more: Relax! Government won't run out of money Thursday)

"I'm once again disappointed" in Boehner for trying to "preserve his role" at expense of country, Reid said, warning that the U.S. could get hit with another credit rating downgrade as soon as tonight.

The back-and-forth came as the partial shutdown entered its third week and less than two days before the Treasury Department says it will be unable to borrow and will rely on a this cash cushion to pay the country's bills.

President Obama is expected to meet with House Democrats at 3:15 pm ET.

On the economic front, the pace of growth in New York state's manufacturing sector slipped in October to its slowest since May, according to the New York Fed's "Empire State" general business conditions index.

Meanwhile, Dallas Fed president Richard Fisher said he sees no reduction in the central bank's bond-buying program this month, due to the fiscal standoff in Washington.

"This is just too tender a moment,'' said Fisher.

Apple briefly crossed above $500 after news that Burberry CEO Angela Ahrendts will take over the iPhone maker's retail and online stores starting next year, reporting to CEO Tim Cook. Shares in luxury fashion house Burberry traded lower.

Separately, the tech giant sent out a media event invitation for Oct. 22. The company is widely expected to introduce a new version of its iPad during the event.

Microsoft gained after Jefferies raised its rating on the tech giant to "buy" from "hold" and lifted its price target to $42 from $33.

JCPenney denied a market rumor that the retailer had hired bankruptcy counsel. Shares of the troubled department store chain tumbled nearly 9 percent. Shares have plunged more than 70 percent year to date.

Among earnings, Citigroup fell after the banking giant posted earnings and sales that fell short of expectations.

"Markets will be closely watching the momentum in the mortgage businesses, particularly after the slowdown in refinancing volumes and cost cuts reported in the JPM (JPMorgan Chase) and Wells Fargo results late last week," said Deutsche Bank analysts Jim Reid and Anthony Ip in a research note.

Coca-Cola reported higher quarterly earnings as robust sales of its drinks helped offset the effects of global economic pressures. Still, shares ended lower along with the broader market.

And fellow Dow component Johnson & Johnson ticked higher after the diversified health care company topped quarterly expectations and the company lifted its full-year profit forecast.

Intel, Yahoo and CSX are slated to post earnings after the closing bell.

(Read more: Companies worry about 'stepping on a bomb')

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

Coming Up This Week:

WEDNESDAY: Mortgage applications, CPI*, Treasury int'l capital, housing market index, Beige Book; Earnings from Bank of America, BlackRock, PepsiCo, US Bancorp, American Express, Ebay, IBM
THURSDAY: Fed's Fisher speaks, jobless claims, housing starts*, industrial production*, Philadelphia Fed survey, natural gas inventories*, oil inventories*, Fed's Kocherlakota speaks, Fed's balance sheet/money supply, US debt ceiling deadline, Windows 8.1 available, Dell annual shareholder mtg; Earnings from Goldman Sachs, Verizon, Google, Capital One, Chipotle Mexican Grill
FRIDAY: Leading indicators; Earnings from General Electric, Schlumberger, Morgan Stanley, Honeywell

*Data will not be released due to the government shutdown.

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