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U.S. stocks plunged on Wednesday, closing more than 1 percent lower as investors weighed the impact of the strong dollar on the economy and the coming earnings season.
"My guess is it's dollar-related," said Jack Ablin, chief investment officer at BMO Private Bank. "All part of the mosaic. Economic results in the U.S. here are consistently underperforming economic estimates."
February's durable goods orders posted a decline, rather than the modest expected increase, under pressure from the strong dollar and weak global demand.
"Durable goods were pretty awful," said Peter Boockvar, chief market analyst at The Lindsey Group. Also getting hit are "biotechs, the poster boy for stock market speculation. They've had an extraordinary run."
The iShares Nasdaq Biotechnology ETF (IBB), which is up more than 12 percent for the year, closed down more than 4 percent, dragging the Nasdaq Composite down 2.37 percent.
The Dow Jones industrial average extended losses to close down about 290 points as all the major indices declined, giving back gains from the rally after last week's Fed announcement.
"We broke the morning lows (of 17,928 on the Dow and 2,085 on the S&P 500). They were retesting the morning lows for the second time. If they broke they could snowball and that's what happened," said Art Cashin, director of floor operations at UBS.
Many traders were also rearranging portfolios ahead of earnings season, which begins in April.
"With the indices still at high levels most of the selling (last week) was in the blue chips. The rest of the market avoided any real significant drop," said Peter Cardillo, chief market economist at Rockwell Global Capital. "It might be their turn as portfolio managers lock in profit."
The closed down 30.45 points, or 1.46 percent, at 2,061.05, with information technology leading all ten sectors except energy lower.
The Nasdaq closed down 118.21 points, or 2.37 percent, at 4,876.52.
The U.S. dollar fell about half a percent lower against major world currencies but still held onto gains of more than 7 percent year-to-date. The continued strength in the dollar have resulted in very low to slightly negative expectations for first-quarter results in April. Last earnings season, many companies already blamed the strong dollar for weaker performance.
"Investors are trying to get their earnings estimates closer to reality and that's causing some damage here," said Maris Ogg, president at Tower Bridge Advisors.
Previously, negative economic data tended to send equities higher as investors saw the news as indications the Fed would not raise interest rate hikes soon.
Low "interest rates certainly help but at the end of the day we need earnings and revenues to grow," Ablin said.
Analysts also noted some concern over fighting in Yemen, which borders Saudi Arabia.
It's "manifesting itself overall in strengthening gold and a bounce in crude," said Art Hogan, chief market strategist at Wunderlich Securities. He pointed to 2,070 as a key technical level on the S&P 500 to watch in the close.
Gold futures settled up $5.60 at $1,197.00 an ounce on the New York Mercantile Exchange.
Crude oil inventories showed a gain of 8.17 million barrels last week, more than expected. Crude oil futures settled up $1.70, or 3.58 percent at $49.21 a barrel.
Firming oil prices boosted energy stocks, which led gains in the S&P 500 and the Dow Jones industrial average.
The Dow transports closed down more than 2 percent with JetBlue falling more than 4 percent as all the transports declined.
Read MoreDollar dings stock market confidence
Futures pointed to a higher open and stocks initially traded mildly higher before giving back gains in morning trade.
"I think it's all about the Fed, it's all about the dollar and earnings season soon to come up," said Nick Raich, CEO of The Earnings Scout.
The U.S. 10-year Treasury yield gained on Wednesday to 1.92 percent after trading near 1.86 percent earlier.
"The bonds are telling me (durable goods is) a non-event," said Doug Foreman, chief investment officer at Kayne Anderson Rudnick. "If the bond market were terribly concerned about a weakening" we'd see the 10-year yield fall more than it has.
U.S. stocks closed lower on Tuesday, with the Dow off 104 points and bond yields lower as investors piled into the safe-haven trade.
Weekly mortgage applications for the week ended March 20 rose 9.5 percent from the previous week to the highest level since January, the Mortgage Bankers Association said on Wednesday.
In the continuing post-Fed statement remarks by central bank officials, Chicago Fed President Charles . Otherwise, there is "no compelling reason" to hike interest rates, he said.
"I think over the last couple weeks the Fed comments ... keep getting reinterpreted by the Fed speakers (which are) more hawkish," Ogg said. "I think it probably confirms we get a rate hike this year and that's healthy."
"The dollar is probably the primary thing working on earnings, more so than oil," she said.
Kraft Foods surged more than 35 percent to a high on news that the firm will merge with Heinz to form Kraft Heinz, with Heinz shareholders owning 51 percent of the combined company and Kraft shareholders owning 49 percent. Kraft shareholders will also receive a special dividend of $16.50 per share.
American Express CEO Ken Chenault outlined the financial services giant's future plans in a presentation to investors. American Express has faced bumpy times in recent months, including the loss of its long-standing partnership with Costco.
Facebook kicked off its annual developer conference, with CEO Mark Zuckerberg among the speakers. The conference will run for two days instead of one for the first time.
European equities finished sharply lower as technology weighed and the euro strengthened on Wednesday, despite better-than-expected data from Germany.
Greece risks running out of cash by April 20 unless it secures fresh aid, a source familiar with the matter told Reuters on Tuesday, leaving it little time to convince skeptical creditors it is committed to economic reform.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 15.
For every seven decliners, three shares advanced on the New York Stock Exchange, with an exchange volume of 791 million and a composite volume of nearly 3.5 billion in the close.
—CNBC's Patti Domm and Peter Schacknow contributed to this report.
On tap this week:
Earnings: Paychex, Apollo Education Group, Yingli Green Energy, Red Hat, Five Below, Worthington Industries
Earnings: ConAgra, Accenture, Lululemon Athletica, Gamestop,Restoration Hardware, Scholastic, Commercial Metals
8:30 am: Initial claims
9:45 am: Services PMI
1:00 pm: $29 billion seven-year note auction
6:30 am: Fed Vice Chairman Fischer speaks in Germany
8:30 am: Real GDP (Q4 third)
10:00 am: Consumer sentiment
10:00 am: Atlanta Fed President Dennis Lockhart in Detroit
3:45 pm: Fed Chair Janet Yellen on monetary policy in San Francisco, Q&A
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