NEW YORK (CNNMoney) -- U.S. stocks ended in the red Tuesday, giving up an earlier rally, after the Federal Reserve kept rates unchanged and issued a tepid outlook.
The market also remained under pressure from a report that said German Chancellor Angela Merkel rejected the idea of increasing Europe's bailout fund.
The Dow Jones industrial average () lost 66 points, or 0.6%; the S&P 500 was ( ) fell 11 points, or 0.9%; and the Nasdaq dropped 33 points, or 1.3%.
All the major indexes started the day about 1% higher. But stocks pulled back after a Dow Jones report said that German Chancellor Angela Merkel has rejected suggestions to raise the funding limit for the European Stability Mechanism, or ESM, which currently stands at €500 billion. The fund goes into effect next year and may run alongside the €440 billion European Financial Stability Facility.
Though political leaders have been taking steps toward a resolution for the region's debt problems, the details have yet to be worked out.
The euro was under pressure, falling to its lowest level since mid-January and coming dangerously close to breaching the key $1.30 level against the dollar.
"All eyes are still on Europe," said Tim Ralph, portfolio manager at Biltmore Capital. Official meetings and statements will be minimal as the year come's to a close, but Ralph said that the market remains vulnerable to headline risks.
Investors are on watch for possible downgrades on European country credit ratings from Standard and Poor's, which warned last week that it may strip some of Europe's biggest economies, like Germany and France, of their AAA-rating.
Meanwhile, the Federal Reserve left interest rates unchanged, as expected, and said that the economy is expanding moderately, with some improvement in labor conditions.
However, the Fed also warned that "strains in global financial markets continue to pose significant downside risks to the economic outlook."
The central bank also kept mum on plans to improve its communications strategy next year.
"The Fed just gave us more of the same," noted Mark Lamkin, chief investment strategist at Lamkin Wealth Management. "There was a bit of optimism that they might open the door a little wider and take a step though, but they're not willing to risk using one of their last arrows -- like QE3 -- just yet."
World markets: European stocks finished mixed. Britain's FTSE 100 ( ) ticked up 1%, while the DAX ( ) in Germany fell 0.3% and France's CAC 40 ( ) edged down 0.8%.
Asian markets ended lower. The Shanghai Composite () lost 1.9%, the Hang Seng ( ) in Hong Kong shed 0.7% and Japan's Nikkei ( ) declined 1.2%.
Companies: Former MF Global ( ) CEO Jon Corzine returned before Congress Tuesday, this time flanked by two former colleagues from the brokerage's parent company, MF Global Holdings: Chief operating officer Bradley Abelow and chief financial officer Henri Steenkamp.
Intel warned on Monday that it will badly miss its sales forecast for the current quarter, because of the worldwide hard drive shortage caused by massive floods in Thailand. Shares of Intel ( , Fortune 500) dropped nearly 4% in trading Monday, and continued to slip on Tuesday.
Netflix's (Fortune 500). On Monday, a spokesman for Netflix said the company doesn't comment on speculation.) stock fell a day after spiking on chatter that the company could be acquired by Verizon ( ,
Sales were expected to have increased by 0.6%, after a 0.5% increase the month prior.
Oil for January delivery rose $2.37 to settle at $100.14 a barrel.
Gold futures for February delivery fell $5.10 to settle at $1,663.10 an ounce.
Bonds: The price on the benchmark 10-year U.S. Treasury rose, pushing the yield down to 1.96% from 2.01% late Monday.
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