Fiscal uncertainty, Middle East weigh on Wall Street

U.S. stocks fell 1 percent on Wednesday as investors worried over U.S. budget negotiations and a flare-up of violence in the Middle East.

Investors are grappling with the impact of the U.S. "fiscal cliff," a series of mandated tax hikes and spending cuts that start to take effect early next year.

U.S. President Barack Obama pushed for his proposal to have the wealthy pay more in taxes as a way to tame the federal deficit, taking a hard line in his opening bid before he begins talks with U.S. lawmakers later in the week.

"I think we will have a last-minute cliffhanger solution," said Michael Cheah, portfolio manager at SunAmerica Asset Management in Jersey City, New Jersey, about a deal to avoid the so-called cliff.

"In the meantime, the market is going to get punched every day."

Taxes on capital gains and dividends could rise as part of the negotiations, pushing investors to sell this year and pay lower taxes on their gains.

Adding to the selling pressure, Israel launched a major offensive against Palestinian militants in Gaza, killing the military commander of Hamas in an air strike and threatening an invasion of the enclave.

"It's a combination of continued uncertainty around the fiscal cliff and military action in the Middle East," said Jim Russell, chief equity strategist for U.S. Bank Wealth Management in Cincinnati, about the main catalysts for the market's downturn.

The Dow Jones industrial average fell 125.64 points, or 0.98 percent, to 12,630.54. The S&P 500 Index dropped 11.83 points, or 0.86 percent, to 1,362.70. The Nasdaq Composite Index dropped 22.43 points, or 0.78 percent, to 2,861.46.

The S&P 500 closed below its 200-day moving average for a fourth day in a row on Tuesday, a technical indicator that suggests recent declines could gain momentum.

Wall Street had opened higher after Dow component Cisco Systems Inc reported first-quarter earnings and revenue late Tuesday that beat expectations, driving its shares up 4.8 percent to $17.66. But the positive momentum was short-lived.

European equities fell and the benchmark FTSEurofirst-300 lost 1 percent as Greece's unresolved crisis raised questions about the region's potential for economic growth, while anti-austerity strikes across southern Europe added to concerns that fiscal reforms would be politically difficult to implement.