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US stocks hit by Fed fears and unease over Ukraine

U.S. stocks declined sharply Tuesday, more than wiping out the prior day's gains, with traders citing uncertainty about the tension between Russia and Ukraine and concerns that the strengthening economy will lead to higher interest rates.

Stocks sold off rapidly, with the Dow dropping as much as 199 points, following media reports on comments by Polish officials on the crisis.

"The report today that Russian troops were lining on the borders of Ukraine preparing for an invasion -- whether accurate or not, I don't know, but it was not helpful," said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

"Selling begets selling when certain technical levels are breached," said Luschini, who listed the S&P 500 breaking below Monday's intraday low of 1,921.20 as among the drivers of the accelerated losses.

The CBOE volatility Index, a measure of investor uncertainty, spiked almost 12 percent to 16.87.

"This is a decline in search of an explanation; there is the rumor of an impending Ukrainian invasion. The other is gee, now we have good economic news and it's too strong and they are going to start raising rates. Longer term, very few things have changed," said Bruce McCain, chief investment strategist at Key Private Bank.

Read MoreRussia flexes military muscle along Ukraine border

"Market reports continue to pit lingering concerns over the potential for an early rise in interest rates as a primary driver of negative sentiment. If that's the case, investors now have additional headline risk to fret about as concerns over patients suffering from Ebola virus surface," Andrew Wilkinson, chief market analyst at Interactive Brokers, wrote in an afternoon email.

Target slid after the discount retailer cut its second-quarter profit outlook; Halliburton and Chesapeake Energy were among the energy companies falling along with energy costs, and Coach gained after the luxury retailer tallied better-than-expected quarterly revenue.

Read MoreMidday movers: Family Dollar Stores, Target & More

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S&P 500
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NASDAQ
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After a 199-point fall, the Dow Jones Industrial Average shed 139.81 points, or 0.8 percent, to 16,429.47, with Intel leading blue-chip losses that included 27 of 30 components.

The S&P 500 lost 18.78 points, or 1 percent, to 1,920.21, with energy the worst performing and all 10 main sectors in the red.

The Nasdaq dropped 31.05 points, or 0.7 percent, to 4,352.84.

For every share rising, more than two fell on the New York Stock Exchange, where nearly 703 million shares exchanged hands. Composite volume neared 3.5 billion.

On the New York Mercantile Exchange, crude futures shed 91 cents to $97.38 a barrel, a six-month low; gold futures finished the floor session by settling down $3.70 at $1,284 an ounce, then turned higher in electronic trade.

The U.S. dollar advanced against other global currencies and the 10-year Treasury yield held steady at 2.486 percent.

Traders work on the floor of the New York Stock Exchange in New York.
Getty Images
Traders work on the floor of the New York Stock Exchange in New York.

Stocks had opened lower and continued their declines in the wake of better-than-expected U.S. economic reports, which heightened speculation that the Federal Reserve might hike rates sooner than expected.

The Institute for Supply Management's service index climbed to 58.7 in July for its highest reading since December 2005, while a separate survey found orders for U.S. factory goods rising 1.1 percent in June.

The data showed "continued strength in the overall economy, and people are reading it as the Fed is going to raise rates soon, that is part of what has markets in a funk right now," said Paul Nolte, senior vice president and portfolio manager at Kingsview Asset management.

The upbeat reports on the economic rebound "again brings the policy of the Federal Reserve front and center and that is why good economic news is not translating into better stock-market performance," emailed Peter Boockvar, chief market analyst at the Lindsey Group.

Economic data from outside the United States Tuesday had China's services purchasing managers' index dropping to 50.0 in July from 53.1 in June, with the disappointing report somewhat countered by separate numbers showing expansion in the euro-zone's service sector.

"We had some economic news out of Europe this morning that was not that bad, and then the Chinese service index actually receded, so mixed economic activity abroad," said Peter Cardillo, chief market economist at Rockwell Global Capital.

Read MoreTuesday could show that bulls are back in business

On Monday, stocks climbed, with the S&P 500 bouncing back from its biggest weekly hit since 2012, as companies including Berkshire Hathaway reported results.

Read MoreUS stocks end higher; Dow halts 4-day loss streak

—By CNBC's Kate Gibson

Coming Up This Week:

Wednesday

Earnings: Time Warner, Mondelez International, Chesapeake Energy, Devon Energy, Viacom, AOL, Molson Coors Brewing, Devon Energy, DishNetworks, Ralph Lauren, Transocean, 21st Century Fox, Keurig GreenMountain, CenturyLink, Jack in the Box, Zulily, ING

8:30 a.m. International trade

Thursday

Earnings: Wendy's, Orbitz, CBS, Monster Beverage, News Corp, Nvidia, Mylan Labs, AMC Networks, Zynga, Lionsgate, Sprouts Farmers Market, Windstream,Duke Energy, Sempra Energy, Stratasys, Teradata, Computer Sciences, GreatPlains Energy

Weekly chain store sales

8:30 a.m. Initial claims

3:00 p.m. Consumer credit

Friday

Earnings: Brookfield Asset Management, Buckeye Partners,Petrobras

8:30 a.m. Productivity and costs

10:00 a.m. Wholesale trade

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