The Dow Jones industrial average dropped 109 points in afternoon trading to 15,144, a decline of 0.7 percent. Other major market indexes also fell.
The stumble was the latest volatile turn in stock trading as investors try to figure out when and by how much the Federal Reserve will ease back on its $85 billion a month in bond purchases. The market started the day slightly higher after encouraging reports on home prices and trade.
Stocks started to slump around 1:15 p.m. Eastern Daylight Time when comments were reported from Esther George, president of the Kansas City branch of the Federal Reserve. George said that in light of "improving economic conditions" and other reasons, "I support slowing the pace of asset purchases as an appropriate next step for monetary policy."
"History suggests that waiting too long to acknowledge the economy's progress and prepare markets for more-normal policy settings carries no less risk than tightening too soon," George said in a speech in Santa Fe, N.M.
While it's well-known that the Fed's next move will be to slow down its bond purchases, nobody is sure when that will happen. As a result, traders have been trying to out-guess each other in anticipation of the Fed's next step, seizing on comments from Fed officials and minutes from a recent meeting of Fed policymakers to send stock and bond prices swinging sharply over the past two weeks.
The next data point for investors is the Labor Department's closely watched monthly employment survey due out Friday. Oddly enough, a weak report might be encouraging to stock investors since it would imply that the Fed would keep buying bonds to support the economy.
That's the reaction the stock market had on Monday, when traders interpreted an unexpected slowdown in U.S. manufacturing last month as the latest sign that the Fed wasn't close to winding down its stimulus program.
"You gotta believe that people are getting ready for the end of the week," said Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.
The Fed's bond purchases have helped keep bond prices high and the yields they pay low. The Fed's goal is to encourage borrowing and investing with low interest rates.
Many investors expect long-term interest rates to rise when the Fed scales back its bond-buying. If they climb high enough, more investors may be tempted to buy bonds instead of stocks. Trying to anticipate that outcome, many traders are pre-emptively selling stocks on the slightest signs that the Fed may be closer to slowing its stimulus.
The current yield of 2.13 percent on the benchmark 10-year Treasury note is extremely low by historical standards. It's also nearly identical to the average dividend payment of 2.14 percent for stocks in the S&P 500.
In other stock trading, the Standard & Poor's 500 index was down 11 points to 1,629, a decrease of 0.7 percent, as of 2:39 p.m. Energy companies were the only one of the 10 industry groups in the index to rise.
The Nasdaq composite fell 21 points to 3,444, a decrease of 0.6 percent.
General Motors gained 2 percent on news that the company will be added to the S&P 500 index on Thursday, replacing H.J. Heinz Co. The ketchup maker's acquisition is getting bought by Warren Buffett's Berkshire Hathaway and the private equity firm 3G Capital. GM was up 75 cents to an even $35.17.
The price of crude oil rose 72 cents to $94.17 a barrel and gold fell $14 to $1,397 an ounce.
Among other companies in the news:
— Dollar General slumped 8 percent, the biggest drop in the S&P 500. The discount-store chain cut its earnings and revenue forecast for the year ahead because it expects sales to slow. Dollar General's stock dropped $4.06 to $49.48.
— SAIC dropped 1 percent, or 13 cents, to $14.75. The security and communications technology company posted a 31 percent drop in quarterly earnings late Monday, as government spending cuts crimped SAIC's revenue.
— Salesforce.com announced plans buy the marketing software company ExactTarget for $2.3 billion. Salesforce fell 3 percent, or $1.13, to $39.91. ExactTarget jumped 52 percent, or $11.61, to $33.71.