Stocks End in Red on China Fears; Banks Gain

Stocks finished in negative territory Tuesday amid worries over China's economic outlook and as investors took a breather following the recent market rally.

The Dow Jones Industrial Average fell 68.94 points, or 0.52 percent, to close at 13,170.19, led by Caterpillar and Alcoa, but still recovered from its 110-point decline near the start of the session.

Meanwhile, Bank of America rallied after the bank said it had no intention of introducing additional equityin a secondary offering, contrary to rumors.

The S&P 500 slid 4.23 points, or 0.30 percent, to finish at 1,405.52, but still ended above the 1,400 milestone. The Nasdaq erased 4.17 points, or 0.14 percent, to end at 3,074.15.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, closed above 15.

Among the key S&P sectors, industrials and energy led the laggards, while financials edged higher.

BHP Billiton tumbled after the CEO of the world's largest miner said the company was seeing signs of "flattening" iron ore demand from China, raising concerns over the nation's economic outlook, though temporarily it was pushing ahead with plans to expand production. Rival Rio Tinto also declined. (Read More: BHP Comments 'Misinterpreted')

“[China] already came out a few weeks ago and lowered their official growth rate,” noted John Fox, director of research at Fenimore Asset Management, adding that BHP Billiton CEO’s comments shouldn’t have been a surprise to the markets.

In addition, China announced it was increasing gasoline and diesel prices by 6 to 7 percent, the biggest increase in nearly three years, likely putting further burden on consumers.

Meanwhile, oil prices settled below $106 a barrelafter Saudi Arabia promised to meet any shortfalls in global oil supplies.

Despite steep losses in major materials and industrials, companies such as Yum Brands , which have big exposure to China still ended higher.

“The overall economic trend is definitely getting better,” said Fox. “Market has been very strong this year and there are only a few assets or sectors that are down so people are waiting to get on but are still nervous.”

Still, Fox said he expects housing and jobs numbers to improve throughout the year, which will continue to drive the market rally. He advised investors to look into economically cyclical sectors such as financials, industrials, techs and materials.

Apple closed at another all-time high, despite controversy over the new iPad overheatingwhile running games. Consumer Reports told CNBC that the temperature does not pose a serious problem and shouldn't warrant a recall.

H-P slid after a report that the tech giant announced a reorganization that will combine its imaging and printing divisions under its PC-making personal systems group.