"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 Dow Jones Industrial Average closed down 292.60 points, or 1.62 percent, at 17,718.54, with Chevron and Exxon Mobil the only advancers and Microsoft the greatest laggard.
The S&P 500 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.