By Jonathan Cheng

U.S. stocks pulled back after two days of strong gains as investors reassessed the latest smoke signals from the fiscal negotiations in Washington.

The Dow Jones Industrial Average gave up 98.99 points, or 0.74%, to 13251.97, with bulk of those declines coming in the final 25 minutes of trading to finish at the day's low.

The Standard & Poor's 500-stock index fell 10.98 points, or 0.76%, to 1435.81, on a day when all 10 of the index's sectors finished in negative territory. The Nasdaq Composite fared better, giving up 10.17 points, or 0.33%, to 3044.36.

The retreat comes one day after the Dow posted its first back-to-back triple-digit gains since July. Those gains were largely fueled by investor optimism that lawmakers in Washington were reaching a consensus on budget negotiations, ahead of a year-end deadline that would trigger a series of tax hikes and spending cuts.

On Wednesday, however, Rep. John Boehner (R., Ohio) said in a terse televised statement that the House would approve legislation on Thursday to keep income tax rates the same for all Americans earning less than $1 million a year, and would maintain the current estate tax rate at 35% charged only to estates worth $5 million or more. Mr. Boehner suggested the proposal, known as "Plan B," would be the last option for avoiding the so-called fiscal cliff at the end of the year.

Earlier, President Barack Obama had suggested he would veto such a deal. House Minority Leader Nancy Pelosi (D., California) underscored the tension later in the afternoon, talking tough on the Republicans' latest remarks.

"I'm not sure a deal was ever in the bag. There were some in the market who had thought that, given the averse effects of not making a deal, there'd be a 'kumbaya moment' in Washington," says Jason Ware, market strategist at Albion Financial Group in Salt Lake City, Utah.

"We still think a deal is going to happen, but the timing of any deal is much more dubious at the moment," he added. "Both sides have really said that they don't think the other side is serious, and the clock is ticking."

Weighing most heavily on the downside Wednesday were telecommunications, health-care, consumer staple and utilities stocks--the four defensive sectors.

Alcoa was one of the biggest Dow laggards, falling 3% after Moody's Investors Service placed the aluminum company's debt rating on review for a downgrade, putting it in danger of falling into "junk" territory. Moody's cited concerns falling aluminum prices.

General Electric, Home Depot and American Express also fell, dropping 3.1%, 2% and 1.8% respectively.

Offsetting some of those declines were technology stocks, following strong earnings from Oracle.

European markets were broadly higher. The Stoxx Europe 600 rose 0.4% to its highest level since May 2011 amid strong German data and an upgrade of Greek debt by Standard & Poor's that pushed up Greek stocks.

Germany's Ifo institute's business confidence index rose to 102.4 in December from 101.4 in November, above expectations of 102.0. The sub-index for current conditions slipped slightly, but the one for business expectations increased. Germany's DAX stock index inched up 0.2% to its highest level since January 2008.

Asian markets were mostly higher. Japan's Nikkei Stock Average surged 2.4% to its highest close since March. The index's biggest one-day leap since September 2011 was powered by strength in banking and exporter stocks. Australia's S&P ASX 200 gained 0.5% to a fresh 17-month high.

In U.S. economic headlines, new residential construction fell 3.0% in November from the previous month, following two months of strong gains, to a seasonally-adjusted annual rate of 861,000, just below expectations. The previous month's reading was also revised downward. New building permits, an indication of future construction, rose by 3.6% to an annualized level of 899,000 in November, above economists' estimates.

Crude-oil futures rallied 1.8% to above $89.51 a barrel, while gold futures slipped 0.2% to about $1,666.50 an ounce. The dollar slipped against the euro and edged up against the yen. Treasurys gained, sending the yield on the benchmark 10-year Treasury note down to 1.8000%.

In other corporate news, General Motors surged 6.6% to $27.18 after the U.S. Treasury Department said Wednesday it would sell its holdings in the Detroit auto maker in the next 12 months to 15 months. GM will buy 200 million shares of its own common stock from the Treasury at $27.50 per share by year end, a 7.9% premium to the stock's Tuesday closing price. The remaining 300.1 million shares will be sold through "various means in an orderly fashion."

Herbalife tumbled 12% after investor William Ackman of Pershing Square Capital Management LP said he has been short-selling Herbalife, calling the company a "pyramid scheme."

Oracle shares advanced 3.7% after the technology company reported quarterly earnings and revenue that were above analyst estimates, citing a strong performance by its software and engineered systems businesses.

Digital storage rivals Western Digital and Seagate Technology were among the strongest S&P 500 components, benefiting from a ratings upgrade by Craig-Hallum Capital Group. Western Digital gained 4% to lead the 500 stocks, while Seagate added 3.3%.

FedEx gained 0.9% after the package-delivery giant reported fiscal second-quarter earnings that would have beaten estimates, if not for the effect of superstorm Sandy, and revenue that rose above forecasts. The company also affirmed its fiscal 2013 earnings outlook.

Knight Capital Group jumped 5.7% after the company agreed to merge with Chicago trading firm Getco.

Smith & Wesson Holding bounced 7.2% after President Obama announced that Vice President Joe Biden would spearhead efforts to mold new gun and mental-health policies following last week's school shooting in Connecticut. The stock had tumbled 18% since Thursday's close, just before the shooting.

Navistar International skidded 8.5% after the commercial-truck maker reported a wider-than-expected quarterly loss amid a double-digit percentage drop in sales.

Johnson Controls rose 1.9% after the maker of automotive batteries provided a fiscal 2013 earnings and revenue outlook that were above current analyst projections.

U.S.-listed shares of UBS AG slipped 1.2% after the Swiss banking giant agreed to pay about $1.5 billion to settle accusations that it tried to manipulate benchmark interest rates.

Oncothyreon plummeted 51% after the company said a Phase 3 trial of its lung cancer treatment didn't meet its primary endpoint of improvement of overall survival.

Write to Jonathan Cheng at jonathan.cheng@wsj.com