Shares of Dow Chemical and DuPont both jumped more than 10 percent after news the two chemical giants are expected to announce a merger by Thursday. The deal was first reported by The Wall Street Journal late Tuesday and will likely be followed by a separation into businesses focusing on agricultural, materials services, and specialty products operations.
"They're (mostly likely) going to be doing a spinoff and that could be a catalyst for the stock because historically our studies show the acquirer hasn't done that well," said Jonathan Morgan, deals analyst at The Edge Consulting Group.
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"The big story of the day is Dow, DuPont and Yahoo not going through spinoff. That's not going to move the market (much). The overarching effect of this long slide in commodity prices is Kinder Morgan," said Art Hogan, chief market strategist at Wunderlich Securities.
Pipeline operator Kinder Morgan late Tuesday cut its quarterly dividend 75 percent to 12.5 cents a share.
Energy and materials pared gains but continued to lead S&P advancers after briefly gaining 3 percent and 4 percent each, respectively.
The gains in energy stocks were likely due to short covering, said Mike Arone, chief investment strategist for the intermediary business, State Street Global Advisors. "I don't anticipate that's net long oil positions."
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Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, noted that between the close of Dec. 1 and Dec. 8, the energy sector lost about 10.4 percent and the S&P 500 fell nearly 1.9 percent. Ex-energy, the S&P 500 is down about 1.2 percent during that time, he said.
The major U.S. averages have closed lower every day for the week so far, on track for a loss of about 2 percent or more for the week.
No major economic news is due until retail sales and the producer price index Friday. Key for markets is the Federal Reserve's meeting next week when the central bank could raise short-term interest rates for the first time in nearly a decade.
"The SPX continues to back-and-fill near its 200-day moving average, getting 'wound up' in a triangle pattern ahead of next week's Fed meeting. This means we should expect volatility to increase in the days ahead with a strong directional bias, unlike the fickle price action of late," BTIG Chief Technical Strategist Katie Stockton said in a note. She added that her indicators support an upward breakout and she expects "a year-end rally as positive seasonal influences take hold."
In data reports Wednesday, U.S. wholesale inventories fell 0.1 percent in October as businesses stepped up efforts to reduce the stockpile of unsold merchandise, suggesting inventories would again be a drag on growth in the fourth quarter, Reuters said.
Economists polled by Reuters had forecast wholesale inventories ticking up 0.1 percent in October.
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Treasury yields held lower, with the 2-year yield near 0.92 percent and the 10-year yield at 2.21 percent. The Treasury auctioned $21 billion of 10-year notes at a high yield of 2.233 percent.
The dollar shed 1 percent against the yen, pushing it below 122 yen for the first time since Nov. 6. "A close below (the yen's 100 day moving average) could signal a test of recent trend-line support at 120.01, with a break below 120 likely to grab MAJOR headlines," Robert Sinche, global strategist at Amherst Pierpont Securities, said in a note.
In other corporate news, copper and gold producer Freeport-McMoran said it will suspend its common stock dividend, further revise its oil and gas capital spending plans, and curtail copper production "in response to market conditions." The stock closed up 3.7 percent.
Yahoo confirmed Wednesday it will not spin off its stake in Alibaba. Sources told CNBC late Tuesday that Yahoo would not move forward with the plan. The Internal Revenue Service earlier this year declined to rule on whether the transaction would be tax-free. Shares of Yahoo closed down about 1.3 percent.
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The Dow Jones industrial average closed down 75.70 points, or 0.43 percent, at 17,492.30, with Apple and Nike leading decliners and DuPont the greatest advancer.
The S&P 500 closed down 15.97 points, or 0.77 percent, at 2,047.62, with information technology leading seven sectors lower and materials leading advancers.
The Nasdaq composite closed down 75.38 points, or 1.48 percent, at 5,022.87.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 19.5. The VIX briefly topped 20 in intraday trade for the first time since Nov. 16.
About three stocks declined for every two advancers on the New York Stock Exchange, with an exchange volume of 1.0 billion and a composite volume of nearly 4.4 billion.
Gold futures for February delivery settled up $1.20 to $1,076.50 an ounce.
—CNBC's Patti Domm and Reuters contributed to this report.
On tap this week:
8:30 a.m. Initial claims; import prices
10:30 a.m.: Natural gas inventories
1 p.m.: 30-year bond auction
2 p.m.: Federal budget
4:30 p.m.: Fed balance sheet/money supply
8:30 a.m. Retail sales; PPI
10 a.m.: Consumer sentiment; business inventories
1 p.m.: Rig count
*Planner subject to change.
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