Major market barometers all fell more than 2 percent, including the Dow Jones industrial average, which lost 186 points. Trading volume was low, which can amplify swings in the market.
The selling hit a wide range of industries, from financials to energy, in an otherwise quiet day during a holiday-shortened week. The markets will be closed for Good Friday.
Analysts attributed the pullback to profit-taking after a huge advance in March that gave the Dow its best four-week performance in more than 75 years.
Investors are focused on bank earnings that get under way after the long weekend, and several pessimistic forecasts about potential loan losses have jolted the market in recent days. Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. all report next week.
"The real key is going to be bank earnings," said Joe Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wis. "Really the entire market hinges on that."
According to preliminary calculations, the Dow dropped 186.29, or 2.3 percent, to 7,789.56. The Standard & Poor's 500 index fell 19.93, or 2.4 percent, to 815.55, while the Nasdaq composite index fell 45.10, or 2.8 percent, to 1,561.61.
Traders had been nervous ahead of a report from Alcoa Inc., the first of the 30 companies that make up the Dow to post quarterly results. The giant aluminum maker reported after the closing bell that it lost $497 million in its first quarter as prices fell for the lightweight metal. The company's loss was worse than analysts' had forecast but not as bad as some traders had feared.
Investors have worried this week that Alcoa's results would set the tone for dismal results to come.
Financial stocks fell for a second day. Bank stocks helped push the market to its first loss in five days on Monday after the Treasury Department delayed a program designed to help banks unload soured loans from their books and a prominent analyst said losses at banks are likely to exceed Depression-era levels.
Though investors have been more optimistic in recent weeks, buoyed by some upbeat news about the economy, many analysts have warned that the rally might not be sustainable if earnings reports come in worse than expected.
"I don't think anybody is making a bet on improvement yet," said Jon Biele, head of capital markets at Cowen & Co. "There is still a very much wait-and-see attitude that is weighing heavily on the market."
JPMorgan fell 95 cents, or 3.4 percent, to $27.25, while Wells Fargo & Co. fell 40 cents, or 2.6 percent, to $14.85. Bucking the trend, Citigroup rose 4 cents to $2.76.
In corporate news, General Motors Corp. and Segway Inc. to develop a two-wheeled, two-seat electric vehicle designed to be a clean alternative to traditional cars and trucks in big cities. The announcement came at a perilous time for GM, which is in the midst of a vast restructuring that could lead to bankruptcy.
Alcoa fell 12 cents, or 1.5 percent, to $7.79, weighing on other material companies. The stock rose at times in electronic trading after the closing bell. The after-hours trades aren't always an adequate gauge of investor opinion because trading volume is light.
Even before Alcoa's report, traders were seeing a mix of corporate news Tuesday that hinted at how fractious trading could be in the next month as profit reports arrive.
Emerson Electric Co., which supplies technology and engineering services, lowered its profit forecast for the year because of falling demand. But the reduction wasn't far off from what Wall Street had been expecting so traders sent the stock higher for much of the session. It ended unchanged at $30.89.
International Speedway Corp. fell $5.81, or 23.8 percent, to $18.62 after the motor sports company reduced its full-year forecasts amid weakening economic conditions.
Not all the news was bad. Brinker International Inc., operator of the Chili's Grill & Bar restaurant chain, rose 60 cents, or 3.7 percent, to $16.85 after announcing its fiscal third-quarter results would come in ahead of Wall Street's estimates.
Bond prices rose, pushing the yield on the 10-year note to 2.90 percent from 2.93 percent late Monday.
In other trading, the Russell 2000 index of smaller companies fell 15.86, or 3.5 percent, to 431.70.
About three stocks fell for every one that rose on the New York Stock Exchange, where volume came to a light 1.26 billion shares.
The dollar was mixed against other major currencies. Gold prices rose.
Light, sweet crude fell $1.93 to $49.12 a barrel on the New York Mercantile Exchange.
Overseas, Britain's FTSE 100 fell 1.6 percent, Germany's DAX index lost 0.6 percent, and France's CAC-40 fell 0.9 percent. Japan's Nikkei stock average fell 0.3 percent.