Stocks Get Roughed Up

Crude prices also pressured stocks. Overnight, crude oil touched a record $98.62 a barrel in electronic trading. Crude lost its gains, though, after the Energy Department's weekly inventory report showed a softer-than-expected decline of 800,000 barrels in oil stocks. Oil ended lower by 33 cents at $96.37 a barrel.

Meanwhile, the dollar hit fresh lows against the euro as an official in China said Beijing should adjust its currency reserves to a stronger currency than the dollar.

"The weak dollar is potentially pressuring China to peg its yuan to stronger currencies," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "Historically, China has been forced to buy dollars to maintain the peg. As they turn to sell those dollars, it could cause a short-term crisis."

During a speech on financial markets in New York, Fed Governor Kevin Warsh noted that the central bank may have to act if the decline in the dollar led to higher prices for imported goods.

The dollar's weakness had gold futures surging. Gold jumped $10.10 to close at a record $833.50 an ounce. Silver relinquished early gains and finished lower by 5 cents to $15.32 an ounce.

"All of a sudden today oil was too high and the dollar was too low," said Phillip Roth, chief technical market analyst with Miller Tabak. "The floodgates opened and volume picked up dramatically. This seems to be emotional selling, the first we've seen since August. The market still has a long way to go in its corrective process."