"The market seemed to be assuming the worst-case scenario", says Geoffrey Yu, head of the United Kingdom investment office at UBS Wealth Management.

What about buying the dip?

The S&P 500 index fell 45 points, or 1.7 percent, to 2,612. Earlier in the session, the Dow rose 243 points, while the S&P 500 and Nasdaq also traded higher. Tuesday represented the biggest one-day percentage decline for both the Dow and the Nasdaq since February 8, but only the biggest for the S&P since Friday. Nasdaq took the day's heaviest drop, with a 2.9 percent tumble, or 212 points. MKM technical analyst Jonathan Krinsky notes that the percentage of Russell 3000 stocks trading above their 200-day moving average-a sign of a long-term uptrend-dropped below 60% on February 5, and since then has stayed there on all but a small number of days.

Following the sell-off seen last week, stocks are likely to regain ground in early trading on Monday.

Chinese Premier Li Keqiang also told a conference on Monday that the US and China should maintain negotiations to avoid a trade war. "The underlying strength of companies has perhaps never been better".

More worrying is that as the Fed raised interest rates for the sixth time since 2015, the markets do not appear to buy its optimism about the future, but rather they are seeing the seeds of the next downturn in the trade, security and domestic policies they are now observing.

"This declaration of tariffs on the president's part was his typical opening salvo into a negotiation process", said Randy Frederick, vice president of trading & derivatives at Charles Schwab.

Both US and Chinese officials are working in ways to improve the US' access to China's market.

The Wall Street Journal reported that the U.S. and China have "quietly started negotiating" and that U.S. Treasury Secretary Steven Mnuchin is considering a trip to Beijing for talks.

Microsoft jumped 5.6 percent in midday trading and Bank of America rose 2.8 percent. Safe-play stocks like utilities and real estate companies were holding up best.

Bond prices rose. The yield on the 10-year Treasury note fell to 2.82 percent. The stock gained $4.76 to $88.53. Facebook Inc. was a noticeable underperformer, ending just slightly higher after the Federal Trade Commission said it has an open, non-public probe into the company's privacy practices. The stock eked out a gain of 67 cents, or 0.4 percent, to $160.06.

Traders also had their eye on the latest corporate deal news.

Finish Line vaulted 29.9 per cent after the sporting goods retailer agreed to be bought by JD Sports Fashion PLC.

The May crude contract closed at 65 dollars, 55 cents U-S per barrel, down 33 cents. Brent crude, used to price global oils, shed 37 cents to $69.44 in London.

Britain's 10-year yield was little changed at 1.44 percent. In other energy futures trading, heating oil dropped 1 cent to $2.02 a gallon.

Gold rose $5.10 to $1,355 an ounce. The Fed's statement introduced the view that 'the economic outlook has strengthened in recent months, ' and highlighted that job gains have been strong. Copper slipped 2 cents to $2.97 a pound.

On the currency front, the U.S. dollar is trading at 105.80 yen compared to the 105.41 yen it fetched at the close of NY trading on Monday. The euro fell to $1.2402 from $1.2455.

In Europe, Germany's DAX fell 0.8 percent, while France's CAC-40 lost 0.6 percent.

The Bloomberg Dollar Spot Index declined 0.4 percent to the lowest in five weeks. Apple rose 1 percent and JPMorgan Chase increased 1.1 percent.

After leaping more than 660 points on Monday, the Dow industrials ended down by 344 points, or 1.4 percent.