The stock closed at $25.69, having given up most of the 3 percent gain it recorded before the market opened.
Mattel, whose brands include Barbie, Hot Wheels and Fisher-Price, will sell its products to Chinese consumers via Alibaba's marketplace Tmall.com starting in the middle of the year. The companies will begin product development immediately.
"By combining Mattel's unmatched expertise in childhood learning and development, with Alibaba's immense reach and unique consumer insights, our goal is to help parents in China raise children to be their personal best," Mattel CEO Margo Georgiadis said in a statement.
Despite Tuesday's lift, Mattel's stock is down more than 7 percent year-to-date. Last month, the toymaker reported earnings per share of 52 cents, well short of the 71 cents expected by Thomson Reuters. Revenue for the quarter tumbled 8 percent to $1.83 billion.
Mattel named Georgiadis CEO last month, as it attempts a turnaround.
Correction: This story has been updated with the correct spelling of Thomson Reuters.