The blue-chip Dow Jones Industrial Average ($INDU) lost 165 points, or 1.5%, to close at 10,979. The tech-heavy Nasdaq Composite ($COMPX) dropped 44 points, or 1.9%, to settle at 2,437. The broader S&P 500 ($INX) shed 19 points, or 1.6%, to close at 1,166.
U.S. equities followed European markets lower after China raised its key interest rate for the first time since 2007 in order to control inflation in a potentially overheating economy. China's gross domestic product grew more than 10% in the second quarter.
The U.S. Dollar Index, which measures the greenback against a basket of currencies, had its steepest increase in two months.
Gold fell $39 an ounce to settle at $1,333 on the Comex division of the New York Mercantile Exchange (CME), while oil slipped $3.63 to $79.45 a barrel.
As the engine of the global recovery, China's new policy especially hurt energy, commodities and materials stocks. Dow components ExxonMobil (XOM) and Chevron (CVX) each fell 2%. Alcoa (AA) lost 3.7% and Caterpillar (CAT) lost nearly 2%.
Financials, meanwhile, held up relatively well, even after more mixed earnings reports. Bank of America (BAC), the nation's largest bank by assets, reported a surprise quarterly loss early Tuesday. Separately, the firm is facing pressure to buy back $47 billion in bad mortgages packaged by Countrywide, according to a media report. The Dow component fell 4.5%.
On the other side of the ledger, Goldman Sachs (GS) reported sharp declines in third-quarter earnings and revenue, hurt by slower trading activity over the summer, but its profits still easily exceeded analysts' average forecast. Shares rose 2% in a down market.