Stocks pared losses, although continued to trade lower, as buyers stepped into the market in afternoon trading even as investors remained unnerved by the escalating nuclear crisis in Japan.
The Dow Jones Industrial Average fell more than 135 points, coming back from a nearly 300 point drop shortly after the market opened, and after dropping 51 pointson Monday.
Most Dow components fell, led by Intel , Cisco and Bank of America , while Chevron gained.
The S&P 500 and the tech-heavy Nasdaq both fell less than 1 percent, after dropping more than 2 percent earlier. Intraday, the Nasdaq fell to below the level where it started the year.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, soared more than 13 percent, to nearly 24, after skyrocketing more than 25 percent at the start of trading.
All key S&P 500 sectors fell, led by utilities, technology, and financials.
Stocks trimmed losses further in the final hour of trading after initially gaining ground after news the U.S. Federal Reserve's policy making committeewould continue its massive bond buying program through June, even as policymakers noted growing strength in the economy. The Fed also said it would leave interest rates unchanged.
"I think, as traders tend to do, they see things as an opportunity," said Doreen Mogavero of Mogavero & Lee. "I’m not surprised to see a rally in the afternoon," Magavero said, but added, "I’m not sure how it holds. Even though we are doing better than this morning, we are still not doing well."
Trading on Wednesday will take cues from what happens in Japan overnight, she said.
The Fed's policy setting committee appeared to "cut and paste" statements from its Beige book report on regional economic conditions, and recent speeches by Fed Chairman Ben Bernanke, in crafting their statement today, said John Canally, economist at LPL Financial.
"This is just another gradual acknowledgement that things are getting better in the economy, and they are begining to worry about inflation," Canally said.
The statement was also a good transition statement as the Fed moves from being worried about deflation, to keeping an eye on higher input costs and their potential effects on the economy. "I think the Fed is still the markets friend here for at least a couple months," he said.
The initial sharp sell-off in stock as trading began was largely triggered by computer selling programs taking cues from declines in overseas markets in the wake of unsettling news about nuclear developments in Japan, said Peter Costa, president of Empire Executions. But buyers stepped in later in day, even before the Fed statement, finding bargains among heavily beaten-up stocks, including chip names.
"You hate to be a buyer on bad news, but there are opportunities in a lot of sectors," Costa said.
The widespread selling began in Tokyo, as stocks there plunged more than 14 percent at one poinafter the quake-hit Fukushima nuclear power plantwas hit by two explosions. A significant rise in radioactive levels added to the anxiety over last week’s disaster, with warnings that winds with radiation could reach Tokyo.
Japan’s economics minister tried to calm investors at a press conference Tuesday, saying there was no reason to close Tokyo markets. The president of the Tokyo Stock Exchange appeared to confirm the markets would remain open in a statement on the exchange's website, although the timing of the statement remained unclear.
"I believe that the Tokyo Stock Exchange in its role as an important social infrastructure should continue to provide opportunities for stock trading," Atsushi Saito, president and CEO of the exchange wrote in a statement. "I would appreciate it if all investors and trading participants would respond in a calm and orderly manner." (Click here for more news on the disaster in Japan).
In addition to the crisis in Japan, investors were absorbing news out of the Middle East. Bahrain declared a state of emergency amid news that troops were sent into the country from Saudia Arabia to quell protests. A soldier from Saudia Arabia was reportedly killed by protesters. (Click here for more on the crisis in the Middle East and North Africa.)
London Brent crude sank more than 4 percent to below $109 a barrel, while U.S. light sweet crude fell more than 3 percent below $98 a barrel, amid expectations that global demand for oil will slow as a result of the crisis in Japan.
The International Energy Agency trimmed its forcast for global oil demand on Tuesday to 1.44 million barrels per day, according to Reuters.
GE rebounded from big losses earlier in the session because of the company's connections to the Japanese nuclear industry, and its potential for lost sales.
The news out of Japan hit utilities and companies active in the nuclear sector, including Exelon , the Southern Company , and Entergy , which all have nuclear plants.
Cameco , a uranium producer, also sank.
Fears about the future of the nuclear industry gave a boost to stocks of renewable energy companies, led by SunPower ,Trina Solar and First Solar , all of which gained more than 6 percent.