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Getty Images. U.S. stocks traded in a range after a solid day of gains as investors eyed data and awaited a speech by Fed Chair Janet Yellen.

U.S. stocks were sharply lower in late trading after oil broke below $40 a barrel and there was more evidence of a weak manufacturing sector in the Fed’s Beige Book. ( Tweet This )

The sell-off began after Fed Chair Janet Yellen reaffirmed the case for a rate hike at the Fed’s Dec. 16 meeting but reiterated that the decision will be data dependent.

“The question of whether the Fed is making a mistake still lingers out there,” said Art Cashin, head of NYSE floor operations for UBS.

Traders also said the market was on edge because of a mass shooting in San Bernardino, Ca .

Art Hogan, of Wunderlich Securities, said the market was nervous about the shootings after the coordinated terrorist attacks in Paris last month. There was no evidence the California shootings were terror related.

“It’s hard to know but even if it’s not it sure feels like it,” said Hogan. “First it’s Paris, then it could be on our shores.”

The S&P 500 fell 1 percent, while the Dow Jones industrial average traded more than 150 points lower. The Nasdaq composite turned lower after earlier holding slight gains.

The Dow fell back into negative territory for the year in intraday trade.

“People squaring up their positions and taking off some risk ahead of ECB and jobs Friday,” said Jeremy Klein, chief market strategist at FBN Securities. He noted some traders could be concerned the European Central Bank’s Thursday decision on monetary policy might not be as stimulative as the market has priced in.

The U.S. central bank’s Beige Book showed economic activity grew at a “modest pace” in most regions. Stocks turned lower as the 2 p.m. release of the data approached.

Treasury yields held earlier highs, with the 2-year yield (U.S.:US2Y) at 0.94 percent and the 10-year yield (U.S.:US10Y) at 2.18 percent.

“I just think it’s another nail in the coffin in terms of a rate hike this month,” said Peter Cardillo, chief market economist at First Standard Financial. “I don’t think it’s because of (the Beige Book). I think it’s oil.”

U.S. crude settled $1.91 lower, or 4.6 percent, at $39.94 a barrel. Weekly crude oil inventories showed an unexpected rise of 1.2 million barrels.

Energy traded more than 3 percent lower to lead all S&P 500 sectors lower. Chevron (CVX), Exxon Mobil (XOM) and Goldman Sachs (GS) were the greatest weights on the Dow Jones industrial average.

“Crude is such a big part of this (selling) right now,” said JJ Kinahan, chief strategist at TD Ameritrade.

The Dow transports fell more than 2 percent to below its 50-day moving average.

Check out CNBC’s special report on energy ahead of OPEC

Earlier, the major averages traded mixed, while the U.S. dollar index spiked to hit its highest level since April 2003 after Yellen said in prepared remarks that the U.S. economy has come a long way, but the Fed’s decision on rates could still be swayed by data before its December meeting.

Yellen also testifies Thursday morning before the Congressional Joint Economic Committee.

“I think people are realizing that a quarter-point rise in the federal funds rate isn’t the end of the world,” said Bryce Doty, senior fixed income portfolio manager at Sit Investment Associates.

The U.S. dollar index dipped below 100 after earlier touching a high of 100.51, topping the 100.39 high from March to briefly trade at levels not seen in more than 12 years.

The euro recovered to trade above $1.06, while the yen traded near 123.31 yen against the dollar as of 2:16 p.m.

Gold settled down $9.70 at $1,053.80 an ounce, off session lows of $1,049.40 an ounce, its lowest level since Oct. 2009.

Read More Bond market is starting to get cold feet about rates

Earlier, the Nasdaq composite attempted to hold slight gains as shares of Apple (AAPL) struggled for gains and Qualcomm traded higher. The Nasdaq 100 briefly traded above its closing high of 4,719.06.

Qualcomm (QCOM) traded about 6 percent higher after briefly jumping more than 8 percent in opening trade after news the chipmaker entered a 3G/4Glicensing agreement with Chinese smartphone maker Xiaomi .

Amazon (AMZN), Netflix (NFLX) and shares of Alphabet (GOOGL) hit all-time intraday highs in morning trade Wednesday.

Read More Fed’s Lockhart: Upcoming FOMC meeting may be ‘historic’

“The Fed has a sort of an unspoken agreement that they’re going to give a consistent message going into (the Fed meeting,” said Sharon Stark, managing director and fixed income strategist at D.A. Davidson.

“The employment report on Friday is going to be important. If it’s weaker than expected then there may be questions about maybe the Fed won’t hike, but I don’t think (that would derail the Fed) given the strength of the ADP report,” she said.

The Federal Open Market Committee meets Dec. 15 to 16 and could raise short-term interest rates for the first time in nearly a decade.

“Given past rhetoric, the fading of financial market instability and Chinese concerns, and generally robust U.S. domestic data, her likely goal will be to elevate the market’s expectation for a December rate hike from just above 70 percent to close to 90 percent. In this way, the Fed will manage to avoid too much disruption on the December 16th decision day,” RBC Global Asset Management Chief Economist Eric Lascelles said in a note.

Investors are also looking ahead to the European Central Bank’s decision on monetary policy due Thursday morning ET.

“It’s a lot to talk about,” said Maris Ogg, president at Tower Bridge Advisors. “I don’t think any of it’s terribly important. We probably know what’s going to happen.”

Markets expect further easing from the ECB. The probability for a December hike in the United States has held steady above 70 percent, according to CME’s FedWatch tool.

Ahead of Friday’s November jobs report, ADP data showed November private payrolls topped expectations at 217,000 .

Revised third-quarter productivity rose 2.2 percent , while unit labor costs rose 1.8 percent.

U.S. stocks closed near session highs Tuesday, the first trading day of December, shaking off intraday pressure from the weak manufacturing data.

Over the last 10 years, the S&P 500 (^GSPC) was up 70 percent of the time in December with an average return of 1.27 percent, according to analysis using Kensho.

In other corporate news, Yahoo (YHOO) traded more than 5 percent higher after the Wall Street Journal reported the company’s board will discuss selling the flagship internet business, how to maximize the value of its stake in Alibaba (BABA), and consider the future of CEO Marissa Mayer at meetings this week.

An SEC filing showed billionaire investor David Tepper’s Appaloosa Management has taken a 9.25 percent stake in TerraForm Power (TERP), and is considering potential claims over its relationship with parent SunEdison (SUNE).

Read More Early movers: CAB, CVX, MBLY, SUNE, YHOO, ZFGN, C, ASNA & more

In afternoon trade, the Dow Jones industrial average (Dow Jones Global Indexes: .DJI) declined 155 points, or 0.87 percent, to 17,733, with Exxon Mobil the greatest laggard and UnitedHealth(UNH) the only gainer.

The S&P 500 (^GSPC) traded down 22 points, or 1.06 percent, at 2,080, with energy leading all 10 sectors lower.

The Nasdaq (^IXIC) composite traded down 31 points, or 0.6 percent, at 5,125.

The CBOE Volatility Index (VIX) (^VIX), widely considered the best gauge of fear in the market, traded near 16.

About five stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 525 million and a composite volume of nearly 2.8 billion in afternoon trade.

Disclosure: CNBC’s parent NBCUniversal has a minority stake in Kensho

—CNBC’s Patti Domm and Peter Schacknow contributed to this report.

On tap this week:

Wednesday

3:40 pm: San Francisco Fed President John Williams on outlook

Thursday

7:30 a.m.: Challenger Job-Cut Report

7:45 a.m.: ECB rate decision

8:30 a.m.: ECB President Mario Draghi news briefing

8:30 a.m.: Cleveland Fed President Loretta Mester

8:30 a.m.: Initial claims

9:45 a.m.: Services PMI

10:00 a.m.: Fed Chair Yellen at Joint Economic Committee on economic outlook

10:00 a.m.: ISM nonmanufacturing

10:00 a.m.: Factory orders

1:10 p.m.: Fed Vice Chair Stanley Fischer on financial stability and shadow banks

Friday

OPEC meets in Vienna

8:30 a.m.: Employment report

8:30 a.m.: International trade

10:15 a.m.: Philadelphia Fed President Patrick Harker welcoming remarks at policy forum

11:45 a.m.: ECB President Draghi at Economic Club of NY

3:45 p.m.: St. Louis Fed President James Bullard on policy challenges

4:10 p.m.: Minneapolis Fed President Narayana Kocherlakota on policy renormalization

*Planner subject to change.

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