U.S. stocks closed mostly lower on Tuesday ahead of the Federal Open Market Committee's statement that could shed light on the timing of an interest rate hike.
Stocks came off session lows in the close, with only the Nasdaq in the black. The major indices held on to gains for the year.
"I don't know (about the slight recovery in equities) except it's widely recognized that the Fed is going to remain dovish tomorrow," said Bruce Bittles, chief investment strategist at RW Baird. "When you put all the economic reports together we've certainly had a slowdown in economic activity. I think the selling has quit mostly on the assumption the Fed will remain dovish in 2015."
Unlike most analysts, Bittles expects the Federal Reserve to raise its short-term interest rate early next year rather than this summer.
Read MoreFirst rate hike now expected in August: CNBC survey
The FOMC's two-day meeting kicked off Tuesday, with its highly anticipated statement and press conference expected on Wednesday afternoon. Investors are looking at whether or not "patient" remains in the text as an indication of when short-term interest rates might go up.
"I don't think they will signal a rate hike in June," said Peter Cardillo, chief market economist at Rockwell Global Capital. "Whether or not they drop 'patient' is irrelevant. They'll probably replace it with another word that might indicate patience."
U.S. stocks jumped more than 1 percent on Monday, following three weeks of decline in the Dow and S&P 500, as investors positioned themselves ahead of the Fed meeting and options expirations.
"The closer you get to the Fed move the more volatility you have, especially if you throw the strong dollar into the mix," said Bill Stone, chief investment strategist at PNC Wealth Management. "We think this is a passing soft spot in the economy."
Out of previous 11 trading sessions the Dow has had 8 triple-digit closures, four up and four down.
Read MoreInvestors slash US exposure on rate hike fears
The U.S. dollar continued to ease, falling about 1 percent, while the euro briefly edged above $1.06. The U.S. 10-year Treasury yield traded near 2.06 percent.
Crude oil settled down 42 cents at $43.46 a barrel, the lowest since March 2009. Brent held above $53 a barrel.
"I think we're still tied to the dollar," said Art Hogan, chief market strategist at Wunderlich Securities. "The correlation really hasn't broken down. The correlation is tighter with currency than with oil."
US Dollar index for the last 10 days
The Dow Jones industrial average briefly slumped more than 180 points before closing down 128.41 points, or 0.71 percent, at 17,849.01. DuPont and Caterpillar were the greatest laggards while Boeing and Coca-Cola led five advancers.
The S&P 500 closed down 6.99 points, or 0.34 percent, at 2,074.20, with materials leading nine sectors lower and information technology the only sector in the green. Analysts are watching to see if the index holds above the 2050-2055 range, slightly below the 50-day moving average.
The Nasdaq closed up 7.93 points, or 0.16 percent, at 4,973.43.
"Today really is a bit of a waiting game. A lot of the trade today will be related to (options) expiration" on Friday, said JJ Kinahan, chief derivatives strategist at TD Ameritrade. He expects some intraday volatility and movement in the tech sector ahead of Oracle's earnings after the bell. Adobe Systems also reports after the close.
Housing starts fell 17 percent in February to the lowest level in a year as harsh winter weather took its toll. More encouragingly, building permits rose 3 percent and January housing starts were revised slightly higher to 1.08 million.
MGM Resorts International surged more than 10 percent on news shareholder Land and Buildings sees a 70 percent upside to the casino operator's net asset value if the firm creates a REIT and spins off hotels, a release said. Land and Buildings also said it plans to nominate four directors to MGM's board.
Read MoreMillions of 'underwater' homeowners are trapped
DSW beat estimates by 7 cents with adjusted quarterly profit of 35 cents per share, with sales easily beating estimates. DSW saw comparable store sales rise 7.6 percent, and it also raised its quarterly dividend to 20 cents per share from 18¾ cents per share.
Burlington Stores reported adjusted quarterly profit of $1.43 per share, 11 cents above estimates, with revenue also exceeding forecasts. Burlington saw comparable store sales rise 6.7 percent from a year earlier.
Alibaba was upgraded by Stifel Nicolaus to "buy" from "hold" and added to the Stifel "Select List." Stifel cites long-term benefits from improvements to the online retailer's platform, and notes its multiples compare favorably to those of competitor Amazon.com.
EBay has launched a live auction platform for Sotheby's, with the first sale scheduled for April 1.
Read MoreEarly movers: DSW, BABA, EBAY, RTN, AAPL & more
American Airlines will replace Allergan in the S&P 500 after the close of trading on March 20. Allergan is in the process of being purchased by Actavis.
Last week, Skyworks Solutions replaced PetSmart in the index on BC Partner's acquisition of the pet supplies retailer.
Apple is scheduled to replace AT&T in the Dow Jones industrial average on Wednesday after the bell, as Visa implements a 4-for-1 stock split.
Decliners were a step ahead of advancers on the New York Stock Exchange, with an exchange volume of 707 million and a composite volume of nearly 3.2 billion in the close.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.
High-frequency trading accounts for 47.5 percent of daily trading volume, according to TABB Group. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders.
Gold futures settled down $5.00 at $1,148.20 an ounce.
Read MoreNasdaq Options Market resolves 'system issues'
European equities closed lower on Tuesday, pulling back from highs reached on Monday, as investors there weighed economic data and focused on the Fed meeting in the United States.
Major U.S. Indexes
As of Monday's close:
- The Dow Jones industrial average was within one standard deviation above its 50-day moving average. Since 1981 the index has been in this position 6.51 percent of all trading days, according to quantitative analytics tool Kensho. The probability of the index moving lower is 52.3 percent and the probability of it moving higher in the days following is 47.7 percent.
- The S&P 500 was within one standard deviation above its 50-day moving average. Since 1980 the index has been in this position 6.25 percent of all trading days, according to Kensho. The probability of the index moving higher in the days following is 53.3 percent and the probability of it moving lower is 46.7 percent.
- The Nasdaq composite was within 1.5 standard deviations above its 50-day moving average. Since 1980 the index has been in this position 7.40 percent of all trading days, according to Kensho. The probability of the index moving lower is 61.9 percent and the probability of it moving higher is 38.1 percent.
—CNBC's Peter Schacknow contributed to this report.
Disclosure: CNBC's parent NBCUniversal is a minority investor in Kensho.
On tap this week:
Wednesday
Earnings: FedEx, General Mills, Actuant, Williams-Sonoma, Herman Miller, Guess, Renren, Silver Wheaton, Jabil Circuit
7:00 am: Mortgage applications
10:30 am: EIA oil inventory data
2:00 pm: Fed statement
2:30 pm: Fed Chair Janet Yellen press briefing
Thursday
Earnings: Nike, Lennar, Vince Holding
8:30 am: Initial claims
8:30 am: Current account Q4
10:00 am: Philadelphia Fed survey
Friday
Earnings: KB Home, Darden Restaurants, Tiffany
More From CNBC.com: