U.S. stocks closed lower as recent volatility in bonds and lack of resolution on Greece kept investors on edge ahead of Friday's employment report. (Tweet This)
"The bond market is front and center," said Adam Sarhan, CEO of Sarhan Capital. "Ahead of tomorrow's jobs number it's becoming abundantly clear that the economy is currently not strong and that's the rising concern for investors because that changes the narrative on the Fed."
Other analysts remained optimistic on the economy while noting general uncertainty among traders leading up to the key jobs report and a now-postponed Greece repayment deadline on Friday.
"I think tomorrow's employment report is going to be really good. That's going to raise concerns about the Federal Reserve rate hike," said Robert Pavlik, chief market strategist at Boston Private Wealth.
The decline in stocks accelerated in midday trade as the Dow Jones industrial average and S&P 500 fell below their 50-day moving average.
In choppy trade, the Dow Jones industrial average fell nearly 200 points before closing down about 170 points. The blue chip index briefly swung into positive territory after falling more than 100 points in the open. The Nasdaq traded about 40 points lower after also attempting slight gains. All 10 sectors in the S&P declined.
"The market is doing today what it should have done yesterday. This is how we should behave when rates are higher," Peter Boockvar, chief market analyst at The Lindsey Group, said of the selloff in equities.
U.S. stocks closed higher on Wednesday despite the bond selloff.
"The focus for the rest of today is really going to set up for tomorrow morning," said JJ Kinahan, chief strategist at TD Ameritrade. "With ADP yesterday and jobless claims today, the expectation on the jobs is they will increase."
Futures held lower on morning U.S. data, while Treasury yields dipped to session lows. Yields held near recent highs, with the U.S 10-year Treasury yield near 2.30 percent and the 2-year yield at 0.67 percent.
"It's really lately been all about the bond market. Fixed-income markets are really driving everything else right now," said Chris Gaffney, president of EverBank World Markets.
Earlier, the benchmark-10-year Treasury yield, which moves in the opposite direction of its price, briefly topped 2.40 percent, setting a new high for the year. It tracked the 10-year German Bund yield, which soared to just shy of 1 percent, extending a rise that began on Wednesday after European Central Bank President Mario Draghi played down the impact of bond market volatility.
European equity markets closed lower as the yield surge raised fears that higher borrowing costs could hurt corporate profits and the economic recovery. Asian shares ended the session mixed, with Shanghai recovering from a 5 percent plunge to end modestly higher and Japan's blue-chip Nikkei stock index only just closing in positive territory.
The dollar traded flat against major world currencies, with the euro paring gains after briefly rising above $1.13.
U.S. stocks looked through the bond market rout on Wednesday to close modestly higher as investors gained optimism on Greece debt talks. One day later, lack of resolution added to the pressure on equities, with the Greek ATHEX Composite reversing gains to dip about 3 percent.
"I still believe Greece is affecting Europe a lot more than the United States," said Art Hogan, chief market strategist at Wunderlich Securities. "But the conversation is getting frustrating."
Greece will bundle its four debt payments to the International Monetary Fund due this month into a single payment now due on June 30, the IMF said on Thursday.
Greece's EU/IMF lenders have asked Athens to commit to sell off state assets, enforce pension cuts and press on with labor reforms, two sources familiar with the plan told Reuters on Thursday, demands that would cross the Greek government's "red lines".
Eurogroup chairman Jeroen Dijsselbloem said in a Reuters report that the gap between Greece and its lenders narrowed after discussions this week and that Athens is expected to present alternatives to lenders' proposals within days. Other euro zone leaders were mixed on their outlook of negotiation progress.
"At present, today's (stock market) activity may be impacted by news from Greece or even jobless claims but investors are focused on tomorrow's jobs data and wage growth," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management.
"We're probably headed for a choppy, nervous, volatile market ahead of tomorrow's labor data," said Peter Cardillo, chief market economist at Rockwell Global Capital. He expects the addition of 210,000 jobs with the unemployment rate unchanged.
Before the bell, weekly jobless claims came in at 276,000, below expectations and last week's 282,000 figure. The report comes ahead of the May U.S. non-farm payrolls report on Friday.
U.S. non-farm productivity fell at a 3.1 percent annual rate in the first quarter, down sharply from the previously reported 1.9 percent rate. Unit labor costs were revised higher to show a surge of 6.7 percent.
Federal Reserve Governor Daniel Tarullo said on Thursday that financial regulators are paying close attention to liquidity concerns surfacing across the U.S. bond market.
He also said that second quarter weakness may not be as transitory as it was last year, Reuters reported. He noted strong jobs creation is not accompanied by similar growth in wages.
The U.S. Federal Reserve should delay a rate hike until the first half of 2016 until there are signs of a pickup in wages and inflation, the International Monetary Fund said in its annual assessment of the economy on Thursday. Analysts mostly disregarded the news.
"Maybe the IMF should look at some of the other data coming out because consumer (spending is picking up)," said Tom Stringfellow, president and CIO of Frost Investment Advisors.
The closed down 18.23 points, or 0.86 percent, at 2,095.84, with materials leading all 10 sectors lower.
The Nasdaq closed down 40.11 points, or 0.79 percent, at 5,059.12.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded under 15.
About four stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 729 million and a composite volume of nearly 3.2 billion in the close.
Crude oil futures for July delivery settled down $1.64, or 2.75 percent at $58.00 a barrel on the New York Mercantile Exchange. Gold futures ended down $9.70 at $1,175.20 an ounce.
In corporate news, Apple said it would clear most of watch backlog within two weeks and expanded the offering of the device to seven more countries. Earlier, The New York Times reported that, contrary to many expectations, the iPhone maker will not unveil a new Apple TV box at the Worldwide Developer Conference next week.
L Brands, the Victoria's Secret parent, reported a same-store sales increase of 5 percent for May, above the Thomson Reuters consensus estimate of a 2.8 percent increase.
Five Below earned an adjusted eight cents per share for its latest quarter, 1 cent above estimates, with revenue also exceeding forecasts. The discount retailer also raised its outlook for the year, with sales up 22 percent over a year ago.
—Reuters and CNBC's Peter Schacknow contributed to this report.