Trading was volatile, with investors wary a day after the market's strong surge, which sent the Nasdaq to its biggest advance in more than four years. Investors were also cautious before the US CPI for October is released Thursday.
Technology shares dragged, keeping the Nasdaq in the red, as shares of bellwethers Microsoft, Google and Cisco Systems sustained bouts of profit-taking.
Even shares of oil companies, including Exxon Mobil, declined in the late-day downturn, reversing gains earlier in the day on a 3 percent surge in oil prices.
Merrill Lynch was another standout among financials, its stock up more than 5 percent following news that NYSE Chief Executive John Thain would take over as the investment bank's new CEO.
But technology shares weighed on the broader market a day after the Nasdaq scored its biggest advance in more than four years. Shares of big manufacturers, including Caterpillar
and other energy-hungry industrials, also were on the defensive as oil prices rose.
"In general, I don't think investors are convinced yesterday's move was going to be something sustainable," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.
"Seeing another gap up today, those that were a little more skeptical about yesterday's rally were certainly looking to sell stocks into the move."
The 3 percent gain in oil prices,after falling for the past two days, was supported by expectations of a further drop in US crude oil supplies and as OPEC brushed off US calls to raise output.
Investors also were reacting to news from Bear Stearns, which said the worst of the mortgage market troubles have passedas it announced $1.2 billion in writedowns.
"The real event is the Bear Stearns announcement, which revives confidence that the financial system will not implode. Until Goldman's remarks earlier this week, there was enormous fear that the investment banks were in serious trouble," Michael Metz, chief investment strategist at Oppenheimer & Co. in New York, told Reuters.
But there also were questions about how much more damage would be done by subprime writedowns. UBS said in a research note published late Tuesday that losses could rise to $480 billion in coming years.
Wendy's Offer Disappoints; Financials Gain
Among the biggest losers was of the day was United Rentals , which saw shares tumble after Cerberus Capital Management said it might withdraw its $4 billion leveraged buyout offer for the equipment rental company.
HSBC Holdings, Europe's biggest bank, said third-quarter profits were ahead of a year agoand revenue growth across the group had offset a higher charge for bad debts in the United States.
The trading update reassured investors that HSBC, which doesn't issue quarterly earnings reports, wasn't further exposed to big debts in mortgage-related financial products and was benefiting from its broad spread.
Trading showed strength across the board for banks, with Citigroup , Lehman Brothers, and Merrill Lynch all posting solid gains.
Shares of hedge fund Och-Ziff Capital Management Group opened up 2 percent before turning south, a day after an initial public offering that priced within expectations, raising $1.15 billion.
Spice maker McCormick saw its shares gain after it agreed to buy Unilever Group's Lawry's business for $605 million, a move that adds wet marinades to its range of dry spices.
Shares of Wendy's International slipped on the heels of Triarc Companies' offerfor the fast food chain. The offer was lower than Wendy's had anticipated.
Treasurys slid as the steady stock market turned investors away from safe-haven bonds.
The dollar fell on continued worries that a struggling U.S. housing sector and lingering credit problems could hurt the broader economy.
In the commodities markets, soybean futures at the Chicago Board of Trade soared to a 19-year high due to China's voracious appetite for soybeans and soyoil, traders told Reuters.
Volatility soothed for the second day in a row, with the Chicago Board of Options Exchange's Volatility Index dipping after posting a 22 percent drop Tuesday.
-- Wire services contributed to this report.