Stocks pared losses but remained sharply lower after three days of gains as commodities sank, triggered by an uptick in oil and gasoline inventories against a backdrop of worries over Greek debt and the health of China's economy.
The Dow Jones Industrial Average dropped more than 125 points after rising more than 75 points on Tuesday.
Walt Disney led the blue-chip average lower throughout the session following disappointing earnings and revenue results delivered after the market closed on Tuesday. Disney's amusement parks were hurt by the disasters in Japan, and the poor performance of "Mars Needs Moms."
The Dow got some support from Intel, which jumped after the tech firm said Wednesday it would raise its cash dividend by 16 percent to 21 cents a share.
TheS&P 500 and the Nasdaq also fell more than 1 percent each. The CBOE Volatility Index, widely considered the best gauge of fear in the market, soared more than 8 percent to above 17.
All key S&P 500 sectors declined, led by energy and materials.
The energy sector sank more than 3 percent, with more than 90 percent of all energy stocks lower, as prices for oil futures added to losses after the U.S. Energy Information Administration reported that inventories for crude stocks and gasoline rose more than expected amid sliding demand.
Oil prices were already weaker after news that China's inflation rate slowed in April as industrial output fell and renewed concerns of a global economic slowdown.
The rapid fall in prices of oil and gasoline prompted the New York Mercantile Exchange to halt trading in crude oil, gasoline and heating oil futures shortly after noon. Trading resumed a few minutes later at higher daily price limits.
U.S. light, sweet crude plunged $5.67 or 5.46 percent to settle at $98.21. In London, Brent crudesank $5.06 or 4.3 percent a barrel to settle at $112.57.
"Energy and commodities have been a real leadership group for a long time," said Nicholas Colas, chief market strategist at BNY ConvergEx Group. "The question has always been demand destruction," Colas said. "The inventory numbers got people’s attention."
Commodities have benefited from two things, Colas continued: a weak U.S. dollar and a growing U.S. economy.
"Now we are facing the flip side," he said. The economy's strength is being slowed by higher oil prices, while debt troubles in periphery euro zone countries are causing the dollar to strengthen against the euro. "That’s the second nail in the coffin, which is why you get this exaggered move," Colas said.
On Wednesday, the dollar gained against a basket of currencies as the euro fell, reflecting heightened concerns about the effects of Greece's debt troubles.
A strengthening dollar could lead analysts to revise their forecasts for second quarter earnings, as multinationals will no longer have a weak dollar to fuel their overseas sales, Colas added.
Precious metals also plunged on Wednesday as silver futures fell 7.7 percent to settle at $35.51 and gold futures fell more than 1 percent to settle at $1,501.10. (Read more: Why Commodities Prices Are Falling Again).
In stocks, Yahoo sank after Alibaba.com, which owns Alibaba Group, took full control of Alipay, a Chinese online payment business. Yahoo owns 43 percent of Alibaba.
In corporate news, AIG and the Treasury scaled back plans for share sale, and will now offer$9 billion in AIG stock.
Elsewhere on the earnings front, Macy's soared after reporting fiscal first-quarter earnings that topped analysts' estimates. The department store retailer also raised its fiscal 2011 earnings forecast and its dividend.
Toyota traded higher despite reporting operating profit fell 52 percent and saying output troubles clouded its outlook.
Cisco and Symantec report earnings after the market closes.
Johnson & Johnson gained after Goldman Sachs upgraded the pharmaceutical company to "buy" from "neutral," and downgraded Bristol Myers Squibb to "neutral." The brokerage said it now considers Johnson & Johnson the "best underappreciated new product story in US Pharma."
Google fell after news the search engine company set aside $500 million to settle an investigation by the U.S. Justice Department into its advertising practices. The action reduced Google's net income by $5.51 a share in the first quarter.
JPMorgan , meanwhile, declined after Bernstein cut its 2011 earnings estimates for the banking giant's shares.
Globecomm's shares surged after news the satellite-based communications company has hired JPMorgan as a financial advisor, a move some sources say could lead to a sale, according to news reports.
The U.S. Treasurys extended their rallyafter Treasury auctioned $24 billion of ten-year notes Wednesday at yield of 3.21 percent and a bid-to-cover of 3.00.
In economic news, the U.S. trade deficit widenedto $48.1 billion in March from $45.44 billion in February, the government reported. In June 2010, the trade gap was $49.94 billion. Analysts surveyed by Reuters had expected the gap to widen to $47 billion.
Also the Mortgage Bankers Association'sseasonally adjusted index of mortgage application activity rose 8.2 percent in the week ended May 6, driven by a drop in interest rates.
In Europe, the Bank of England raised its medium-term inflation forecast. Shares in Europe closed higher thanks to positive earnings news, including positive results from Hermes , the French luxury goods group.
On the Calendar This Week:
WEDNESDAY: Earnings from Cisco and Symantec after-the-bell.
THURSDAY: PPI, retail sales, jobless claims, business inventories, 30-year Treasury bond auction, money supply, NPD video game sales, Ford shareholder meeting, options industry conference; earnings from Kohl's and Macy's before-the-bell, and Nordstrom after-the-bell.
FRIDAY: CPI, consumer sentiment, Transocean shareholder meeting; earnings from Petrobras after-the-bell.
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