Early U.S. gains were erased after the European Central Bank said it had stopped providing liquidity to some Greek banks that had not been recapitalized. The ECB's move caused some market confusion, adding to volatility as traders have a quick trigger finger when it comes to news about Greece.

"All eyes continue to be trained on Europe: What is going to happen in Greece, what the potential fallout from that is going to be, so there wasn't much from the Fed data to impact things," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

Investors were not enticed by the minutes from the U.S. Federal Reserve's most recent meeting in which policymakers kept alive the possibility of a fresh round of monetary stimulus for the moderately expanding economy.

Worries about Greece's political and financial future, along with political upheaval in the broader euro zone, have driven equity losses in recent weeks, sending the benchmark S&P index down 5.9 percent since the end of March.

German Chancellor Angela Merkel attempted to assuage investor fears on Tuesday by saying Greece will stay in the euro zone. Merkel's comments helped stem selling prior to the market open.

Opinion polls in Greece show leftists who are opposed to the terms of the international bailout for the country would likely win a new election, set for June 17. Greeks, afraid of the devaluation that would follow an exit from the euro, withdrew at least 700 million euros from local banks on Monday.

J.C. Penney (JCP.N) shares plunged 19.7 percent to $26.75, its biggest one-day percentage drop since at least 1973, a day after the department store owner scrapped its dividend. Penney's financial results showed the effort to remake itself as an affordable fashion-oriented retail chain took a much bigger-than-expected toll on sales in the first quarter.

The Dow Jones industrial average .DJI dropped 33.45 points, or 0.26 percent, to 12,598.55. The Standard & Poor's 500 Index .SPX dropped 5.86 points, or 0.44 percent, to 1,324.80. The Nasdaq Composite Index .IXIC dropped 19.72 points, or 0.68 percent, to 2,874.04.

U.S. output rose in April at its fastest pace in over a year, the Federal Reserve said. A separate report showed a rebound in groundbreaking for U.S. homes in April, suggesting the housing market recovery was gaining.

Domestic data continues to show a modest expansion, leading some analysts to believe the market could be primed for a strong rally if a solution in Greece is reached.

"We have some basic good news here in the U.S., but we have a cloud over the land and that is the Greek cloud and until that situation is finalized, I don't think it is going to be possible for the rally to lift," said Carol Pepper, CEO of Pepper International in New York.

"But when it is finalized, then you are going to see an explosion on the upside because one way or the other this Greek situation is going to be concluded."

General Electric Co (GE.N) gained 3.3 percent to $19 on news its finance arms won regulatory approval to resume returning some of its profit to the parent company. Such a move could clear the way for GE to accelerate stock buybacks and raise its shareholder dividend.

GE Capital plans to pay a special $4.5 billion dividend to GE, the biggest U.S. conglomerate, later this year.

Target Corp (TGT.N) edged up 0.4 percent to $55.32 after the discount retailer raised its full-year profit view.

Facebook Inc (FB.O) boosted the size of its initial public offering by 25 percent and could raise as much as $16 billion as strong investor demand for the No. 1 social network trumps debate about the company's long-term potential to make money.

Volume was active with about 7.59 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, above the daily average of 6.79 billion.

Declining stocks outnumbered advancing ones on the NYSE by 2,014 to 975, while on the Nasdaq, decliners beat advancers 1,659 to 837.

(Reporting by Chuck Mikolajczak, editing by Kenneth Barry)

• A Permanent Economic Emergency