U.S. stocks fell sharply Tuesday, with the Dow suffering a triple-digit decline for a third session, on a combination of gloomy factors.

However, the market recovered some ground just before the closing bell after a report in the Wall Street Journal suggested the Federal Reserve may be moving toward more simulative monetary policies.

The outlook for U.S. economic growth has dimmed amid a recent spate of disappointing reports, including weak manufacturing data from the Richmond Federal Reserve Tuesday.

While investors have found some solace in corporate earnings and sales data, the latest quarterly results from Corporate America were uninspiring.

As if that were not enough, Europe continues to be a major source of concern, with renewed worries about Greece at a time when Spain and Italy are running into trouble.

The Dow Jones industrial average dropped 104 points, or 0.8%, to end at 12,617. Cisco was the biggest laggard on the Dow, a day after the network equipment maker said it planned to cut 1,300 jobs, or about 2% of its global workforce. Shares of Cisco were down nearly 6% in mid-afternoon trading.

The S&P 500 lost 12 points, or 0.9%, to 1,338. The Nasdaq fell 27 points, or 0.9%, to 2,863.

AT&T was the second-biggest drag on the Dow. The mobile-service provider delivered higher-than-expected earnings but missed revenue forecasts, despite strong subscriber growth during the quarter.

UPS shares slumped after the delivery company reported earnings and sales that fell short of forecasts, and cut its outlook. The company blamed uncertainty in the United States, Europe's debt crisis and weak Asian exports.

After the market closed, Apple reported a quarterly profit of $8.8 billion, below estimates. The iPhone and iPad maker also gave lower-than-expected sales and earnings guidance.

Netflix said it earned a profit in the second quarter after losing money in the first quarter. But the online movie and television company said it sees "enormous challenges ahead." Shares fell 13% in extended trading.

Europe's escalating debt crisis was also a catalyst behind Tuesday's sell-off.

Spain successfully auctioned €3 billion of 3-month and 6-month government bills, but investors demanded higher interest rates than last month amid ongoing fears that Spain could require a full-blown bailout.

"It's still unclear how severe Spain's funding problem is right now, and where there's uncertainty, investors become defensive," said Michael Sheldon, chief market strategist at RDM Financial Group.

The yield on the 10-year Spanish bond hit a fresh euro-era record high of 7.636%.

And then there's Greece. The so-called troika of representatives from the European Union, International Monetary Fund and European Central Bank are in Athens to determine whether the nation qualifies for its next installment of bailout money.

Meanwhile, European manufacturing activity remains sluggish. Activity continued to contract across the eurozone in July, while Germany's PMI fell to a three-year low.

Despite the gloom out of Europe and the United States, investors were slightly heartened by a pick-up in Chinese manufacturing activity. Early Tuesday, HSBC said its China Manufacturing Purchasing Managers' Index came in at 49.5 for July. While any reading below 50 indicates contraction, it is the highest number reported since February and shows significant improvement.

As investors continue to navigate through earnings, Europe's debt problems and a slow-moving global economy, Sheldon said markets will remain volatile through the summer.

"Investors remain hostage to decisions by policymakers in China, Europe and the United States," said Sheldon. "Until we get more clarity and bold action, trading is going to be choppy."

World markets: European stocks ended lower. Britain's FTSE 100 slipped 0.6%, while the DAX in Germany dropped 0.5%, and France's CAC 40 lost 0.9%.

Asian markets finished mixed. The Shanghai Composite rose 0.2%, while Japan's Nikkei slid 0.2% and the Hang Seng in Hong Kong shed 0.8% in a session shortened by a typhoon.

Economy: The Richmond Federal Reserve said manufacturing activity in the central-Atlantic region continued to contract in July, coming in at minus 17, the lowest level since April 2009.

The Federal Housing Finance Agency's Housing Price Index for May was up 3.7% from a year earlier.

The news followed a similarly bullish report from real estate listing site Zillow, which showed home prices rose for the first time in five years.