"I think the market now wants to see a cut. The markets are looking for that next step — well you froze production, let's cut it," Canally said.
Energy closed more than 3 percent lower to lead S&P 500 decliners. WTI failed to hold above its 50-day moving average of $32.61 a barrel, while during Monday's rally the S&P never broke its resistance level of 1,950, which is just around the index's 50-day moving average.
Overall trade volume declined for the fourth-straight day to post the second lowest trade volume day of the year, going back to early January.
Stocks extended losses in morning trade after The Conference Board said its consumer confidence index fell to 92.2 in February, down from a downwardly revised 97.8 in January. Analysts polled by Reuters had expected the index to hold near January levels.
"I think obviously the price of oil is giving back part of its gains but I think the fall in consumer confidence is dampening investors' enthusiasm," said Peter Cardillo, chief market economist at First Standard Financial.
Lynn Franco, the economist at The Conference Board who compiled the report, said the decline in consumer confidence in February was due mostly to recent financial market volatility. "There's nothing coming out of this report that suggests consumers see the economy slowing or derailing," she said.
U.S. crude oil futures for April delivery settled down $1.52, or 4.55 percent, at $31.87 a barrel, below Monday's closing price of $33.39 a barrel but a touch above the final price on the March contract of $31.48 a barrel. The March contract rolled to April after the settle Monday.
The Dow Jones industrial average closed about 189 points lower. The index briefly fell 217 points with Goldman Sachs,Chevron and JPMorgan Chase contributing the most to declines. JPMorgan held its investor day Tuesday and its investment banking chief said first-quarter revenues in investment banking fees are down 25 percent, year-over-year.
Home Depot closed nearly 1.4 percent higher, well off session highs but remaining the top contributor to gains in the Dow following encouraging earnings.
The Nasdaq composite underperformed, closing almost 1.5 percent lower as declines in top tech names Apple, Microsoft and Amazon weighed.
"We had a pretty good amount of economic data last week, the majority of which was pretty positive, which I think helped push the market higher, but primarily it's oil doing it," said Randy Frederick, managing director of trading and derivatives at Charles Schwab.
"Even the perception of some sort of a cut in production when you're at record high levels gives you some hope that prices will move higher," he said, noting oil prices will need to approach $40 a barrel "for everyone to be happy."
On the data front, the S&P/Case-Shiller 20-city composite home price index showed a 5.7 percent increase year-over-year in December.
U.S. home resales unexpectedly rose in January, reaching a six-month high, in the latest sign that the economy remains on firmer ground despite slowing global growth and tightening financial market conditions, Reuters said.
The National Association of Realtors said on Tuesday existing home sales increased 0.4 percent to an annual rate of 5.47 million units, the highest level since July. Last month's sales pace was also the second highest since 2007.
Treasury yields held lower, with the 2-year yield at 0.73 percent and the 10-year yield at 1.74 percent.
The U.S. dollar traded a touch higher against major world currencies, with the euro at $1.102 after briefly dipping below to hit a near-three-week low against the dollar. The yen traded at 112.08 yen against the greenback.
The Chinese yuan midpoint fix was weaker against the dollar Tuesday at 6.5273 versus 6.5165 Monday, for the biggest cut in six weeks, according to StreetAccount.
Asian equities closed slightly lower, while European stocks were more than 1 percent lower as low oil prices weighed.
Read MoreStreet watching oil, consumer data
"After a strong open yesterday, stocks digested their gains in a consolidation phase that is giving way to a pullback in the S&P futures this morning," BTIG Chief Technical Strategist Katie Stockton said in a note.
"Our indicators suggest that the relief rally still has a hold on the market, but we expect overbought "sell" signals to unfold by Friday," she said. "With this in mind, we would consider taking down exposure into additional strength, which we think could take the SPX closer to a Fibonacci retracement level near 1980 before the rally falters."
U.S. stocks closed more than 1 percent higher Monday, building on their best weekly gain of 2016, as oil prices climbed.