The Standard & Poor's 500-stock index shed 10.74 points, or 0.87%, to 1225.73, led lower by consumer discretionary and material stocks. The technology-heavy Nasdaq Composite dropped 32.99 points, or 1.26%, to 2579.27.
While the Fed's assessment of the economy was guardedly more upbeat, it was still marked by "significant downside risks." Investors had been hopeful that the central bank would hint at signs of a third round of quantitative easing, or QE3.
"The indication that the Fed isn't getting into QE3 is what's behind this move," said Robert Pavlik, chief market strategist at asset-management company Banyan Partners. "All the euphoria from [the Tuesday morning] rally has been let out of the balloon."
The Fed remains concerned that the economy could suffer from higher taxes and continued government layoffs next year. Worries also remain that repercussions from the sovereign-debt crisis in Europe could roil the economy.
"The market needs confirmation that the Fed has a QE3 bullet and is ready to pull the trigger quickly if needed," said Daniel Genter, chief executive at RNC Genter Capital Management. "Investors want a safety net if something goes terrible in Europe."
Alcoa led the Dow's losses, falling 31 cents, or 3.3%, to 9.04. Caterpillar declined $2.26, or 2.4%, to 90.98.
General Electric shed 4 cents, or 0.2%, to 16.42. GE Chief Executive Jeff Immelt forecast double-digit percentage earnings growth next year, saying he expects the global business environment to be "generally positive," albeit tough and volatile.
Stocks took a hit in midday trading after German Chancellor Angela Merkel reiterated her rejection to increasing the size of Europe's permanent bailout fund, the European Stability Mechanism. The euro continued its slide after Merkel's comment, falling below $1.31 and hitting its lowest level in nearly a year.
The market opened higher after the euro zone's government-bailout fund received a reassuring level of demand in its first sale of short-dated debt. The sale underscored a sign that investors were willing to put their faith in the next phase of Europe's rescue project. An auction of short-term Spanish debt also exceeded its target.
But U.S. retail sales grew less than expected in November after solid gains during the two previous months. While consumers are spending more, high unemployment and worries about Europe are likely making some shoppers cautious during the holiday season.
"The retail-sales momentum was interrupted in November," said Anthony Chan, chief economist for J.P. Morgan Private Wealth Management. "The hope is the recent jump in consumer confidence will make this a one-month blip rather than a new trend we should be prepared for."
Additionally, data showed that small-business optimism improved in December for a third straight month, as the outlook for the labor market improved and as expectations for real sales gains turned positive.
In corporate news, shares of DuPont dropped 42 cents, or 1%, to 43.49 even as the blue-chip diversified manufacturer provided an upbeat earnings and revenue outlook for 2012. The largely upbeat view came after DuPont last week cut its profit forecast for the current year, noting demand has softened in some areas.
Best Buy dropped 4.34, or 15%, to 23.73, as the consumer-electronics retailer's fiscal third-quarter profit plunged 29%. The company kicked off the holiday season with significant discounting and sales weakness in most of its products.
Bond insurer MBIA will pay Morgan Stanley $1.1 billion to settle a two-year-old legal clash over guarantees tied to commercial and residential real estate, according to The Wall Street Journal. MBIA shares rose 8 cents, or 0.7%, to 11.48.
Primerica said Citigroup is offering to sell its remaining equity stake in the company, and has commenced a public offering of eight million Primerica common shares. Primerica shed 93 cents, or 4%, to 22.29.
Urban Outfitters climbed 1.41, or 5.3%, to 27.87. The apparel retailer said in a regulatory filing that fiscal fourth-quarter same-store sales were tracking in the "mid single-digit" positive percentage range, following a 2.6% decline in the third quarter.
Cabot Microelectronics advanced 5.78, or 14%, to 45.99. The company proposed a recapitalization plan that includes paying a special cash dividend of $15 a share and nearly doubling the size of its existing share-repurchase program. For the latest updates on the stock market, visit Stock Market Today For the latest updates PRESS CTR + D or visit Stock Market news Today
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