Stocks sank Wednesday as a sharp drop in the price of oil dragged down energy companies. U.S. crude closed below $40 a barrel for the first time since August.
Investors continue to weigh the implications of potential changes in interest rate policy around the world. The European Central Bank meets Thursday to discuss increasing its stimulus program, and the Federal Reserve is likely to raise rates for the first time in nine years at its next policy meeting in mid-December.
The Dow Jones industrial average fell 158.67 points, or 0.9 percent, to 17,729.68. The Standard & Poor's 500 index fell 23.12 points, or 1.1 percent, to 2,079.51 and the Nasdaq composite lost 33.08 points, or 0.6 percent, to 5,123.22.
Oil and gas stocks fell far more than the rest of the market. Energy stocks in the S&P 500 sank 3.1 percent compared with a 1.1 percent decline in the broader market.
The price of oil was lower all day, and the losses accelerated in the afternoon after the Energy Department reported that U.S. crude inventories rose by 1.2 million barrels last week, while analysts had expected a decline.
Benchmark U.S. crude dropped $1.91, or 4.6 percent, to $39.94 a barrel on the New York Mercantile Exchange. Brent crude, which is used to price international oils, fell $1.95, or 4.4 percent, to $42.49 a barrel in London.
Exxon Mobil fell $2.34, or 3 percent, to $79.55, Chevron lost $2.33, or 2.5 percent, to $90.25 and drilling rig operator Transocean fell 37 cents, or 2.6 percent, to $13.83.
In other trading, Yahoo jumped $1.94, or 6 percent, to $35.65 on reports that the company was considering selling its core Internet businesses in order to avoid a big tax bill on the eventual sale of its stake in Chinese e-commerce giant Alibaba. Yahoo has struggled for years to re-energize its business model.
Outside the drop in oil prices, and its impact on energy companies, investors remain focused on what the world's central banks plan to do at their upcoming policy meetings.
The consensus among investors is that the Fed will raise rates at its December 15-16 meeting. That thesis was reinforced Wednesday, when Fed Chair Janet Yellen indicated that the U.S. economy is on track for an interest rate hike this month, though she was careful to point out that the Fed will need to review any upcoming data before making a final decision.
Government bond prices fell after Yellen's comments. The yield on the 10-year Treasury note rose to 2.18 percent from 2.15 percent late Tuesday.
The data Yellen is referring to includes the November jobs report, which comes out Friday. Economists forecast that U.S. employers created 200,000 jobs last month and the unemployment rate remained steady at 5 percent.
"It's becoming more and more likely that the Fed is going to rate rates," said Kristina Hooper, Head of U.S. Investment Strategies at Allianz Global Investors.
Unless the November employment figures are extraordinarily weak, investors believe the Fed will raise interest rates this month, from record low levels, for the first time since the financial crisis. Some preliminary jobs data out Wednesday supported the prediction that the U.S. jobs market continued to improve last month. The payroll processor ADP said the private sector created 217,000 jobs in November.
In Europe, investors expect the European Central Bank will move in the opposite direction and expand its stimulus program when policymakers meet on Thursday, either by expanding its bond purchases or by cutting interest rates further. ECB head Mario Draghi signaled that action is coming this week as the bank seeks to support growth and push inflation higher.
The U.S. dollar strengthened to 123.24 yen from 122.84 yen. The euro slipped to $1.0613 from $1.0631.
In other energy futures trading in New York, wholesale gasoline fell 7 cents, or 5.1 percent, to close $1.293 a gallon, heating oil fell 6.4 cents, or 4.7 percent, to $1.305 a gallon and natural gas declined 6.6 cents, or 3 percent, to $2.165 a gallon.
In metals, gold fell $9.70, or 1 percent, to $1,053.80 a troy ounce, silver fell seven cents to $14.01 an ounce and copper fell four cents to $2.033 a pound.