"The overall tenor is again a heightened level of anxiety among investors (about) central bank policy, what is growth, what is the direction of growth with currencies. The news we're getting doesn't paint a decisive picture one way or the other," said Eric Wiegand, senior portfolio manager, at U.S. Bank Private Client Reserve.
"There'll be continued churn in the markets and somewhat a sign of disbelief until investors are proven otherwise," he said.
The Nasdaq composite underperformed, falling 2.2 percent as Apple, biotechs and several major tech stocks declined.
Alphabet, Google's parent company, more than halved gains but still closed up 1.3 percent to top Apple as the world's most valuable company.
Facebook gave up gains and closed 0.4 percent lower, while Amazon closed down nearly 4 percent.
"I think (the inability for Google to support market gains is) pointing to a bigger macro issue that's more at hand than just companies that report individually better than expected earnings," said Robert Pavlik, chief market strategist at Boston Private Wealth.
Alphabet reported earnings after the close Monday that beat on both the top and bottom line, helped by a 17 percent rise in advertising revenue. A key advertising metric of aggregate paid clicks increased 31 percent from the previous year, beating consensus expectations of about 22 percent, according to StreetAccount.
Read MoreIs Alphabet cursed now that it is No. 1?
The Dow Jones industrial average closed down about 295 points after falling 340 points in afternoon trade.
Goldman Sachs accounted for about 53 points off the index. Financials were the second-worst decliner in the S&P 500 and the worst performing sector year-to-date, down nearly 12 percent.
"There's a concern that these weaker oil prices could metastasize into the broader credit market," said Jack Ablin, chief investment officer at BMO Private Bank.
Read MoreBanks have some more bad news for the economy
The Dow transports closed down 2.94 percent, with Avis Budget and American Airlines leading decliners. UPS was the only gainer, closing up 0.65 percent after reporting significantly higher quarterly net profit and gave a solid outlook for the year. The firm also reported improved margins in all three of its business units, Reuters said.
Shares of Exxon Mobil closed off session lows but still ended down 2.2 percent after the firm reported a 58 percent drop in profit, hurt by low oil prices. The world's largest publicly traded oil company also said it would cut spending this year by one-quarter, Reuters reported.
The S&P 500 closed down 1.87 percent, holding above the psychologically key 1,900 level after briefly falling below in intraday trade.
"I think we're settling into a range-bound area until the Friday employment report," said Ilya Feygin, managing director and senior strategist at WallachBeth Capital.
"In general the earnings season hasn't been super bad. It hasn't been the problem. The problem has been weaker oil and overall growth," he said.
Auto sales for January came in at a 17.58 million annual rate, the strongest January since 2000, according to Autodata
No other major data was due out Tuesday, ahead of Friday's jobs report.
Kansas City Fed President Esther George, a voting member, said Tuesday the central bank should push ahead with interest rate hikes because of the strong fundamentals of the U.S. economy. She downplayed the impact of financial market volatility, according to prepared remarks.
The U.S. dollar held mildly lower against major world currencies, with the euro near $1.091 and the yen at 120.03 yen against the greenback.
In political news, Texas Senator Ted Cruz beat out national front-runner Donald Trump in the GOP's Iowa caucuses, according to NBC News. Florida Senator Marco Rubio surprised many with a solid third place finish.
Read More What Iowa tells us about the 2016 race now
Democratic candidate Hillary Clinton appeared to have won the Iowa caucus after her rival, Vermont Sen. Bernie Sanders, dubbed it "a virtual tie."
Kelly said the results could be neutral to slightly positive for markets. "The way votes came out last night seemed to focus on more centrist candidates on both sides," he said.
European stocks closed nearly 2 percent lower or more as low oil prices and earnings reports from BP and UBS weighed.
The oil giant reported a significant annual loss for 2015 and plans to cut 7,000 jobs, or about 9 percent of its workforce, by 2017.
The Swiss bank reported earnings that topped analyst forecasts, but the bank reported an unexpected outflow from its wealth management business.
Read MoreUBS wealth arm suffers; Credit Suisse next?
In U.S. corporate news, Mattel reported earnings that beat estimates by 6 cents with adjusted quarterly profit of 67 cents per share, and revenue also came in above analyst forecasts. Mattel's bottom line was helped by its first quarterly sales increase in more than two years, helped by renewed popularity for Barbie dolls and Hot Wheels toys. Shares closed 13.8 percent higher.
Michael Kors beat estimates by 13 cents with adjusted quarterly profit of $1.59 per share, and revenue also came in above forecasts. The luxury goods maker was helped by particular strength in accessories and footwear. The stock surged 23.9 percent for its second-best day ever.
With Tuesday's gains, both Mattel and Michael Kors were positive year-to-date.
U.S. stocks closed narrowly mixed Monday, stabilizing on the first trading day of February, despite declines in oil and soft China manufacturing data.
Read MoreEarly movers: PFE, KORS, ADM, DOW, GOOG, MAT, FIT, TWTR & more
On Tuesday, the Dow Jones industrial average closed down 295.64 points, or 1.80 percent, at 16,153.54, with Goldman Sachs leading decliners and DuPont the only gainer.
The S&P 500 closed down 36.35 points, or 1.87 percent, at 1,903.03, with energy leading nine sectors lower and utilities the only advancer.
The Nasdaq composite closed down 103.42 points, or 2.24 percent, at 4,516.95. Apple closed down 2.02 percent, while the iShares Nasdaq Biotechnology ETF (IBB) closed down 2.8 percent.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 22.
About four stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of nearly 1.1 billion and a composite volume of 4.4 billion.
Gold futures for April delivery settled down 80 cents at $1,127.20 an ounce, after earlier hitting a high of $1,131.50, its highest since early November.
As of Tuesday's close, the major U.S. averages were down nearly 7 percent or more for the year so far. All three indexes were more than 10 percent below their 52-week intraday highs, in correction territory.
—CNBC's Peter Schacknow contributed to this report.
On tap this week:
Earnings: Gilead Sciences, Yahoo, Chipotle Mexican Grill, Edwards Lifesciences
Earnings: Comcast, General Motors, GlaxoSmithKline, Merck, Mondelez Intl., Novo Nordisk, Humana, Intl. Paper, MetLife, Allstate, AvalonBay, Boston Properties, GoPro, Lincoln Natl., NXP Semiconductor, Yum Brands
7 a.m.: Mortgage applications
8:15 a.m. ADP employment
9:45 a.m. Services PMI
10 a.m. ISM nonmanufacturing
10:30 a.m.: Oil inventories
Earnings: AstraZeneca, ConocoPhillips, Philip Morris, Cigna, Clorox, Credit Suisse, Dunkin Brands, NY Times, Tempur Sealy, Hartford Fincl., LinkedIn, News Corp., Symantec, Decker's Outdoor, DeVry Education, Lions Gate
7:30 a.m.: Challenger Job-Cut Report
8:30 a.m. Initial claims; productivity and costs
10 a.m. Factory orders
10:30 a.m.: Natural gas inventories
4:30 p.m.: Fed Balance Sheet/Money Supply
5 p.m. Cleveland Fed President Loretta Mester on economy, policy
Earnings: BNP Paribas, Nippon Telegraph, Estee Lauder, Toyota Motors, Tyson Foods, Moody's, Weyerhaeuser, Aon, CME Group, Ametek
8:30 a.m. Employment report; international trade
1 p.m.: Oil rig count
3 p.m. Consumer credit, Treasury STRIPS
*Planner subject to change.
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