By Caroline Valetkevitch
NEW YORK (Reuters) - U.S. stocks briefly cut losses in choppy trading on Tuesday after Federal Reserve Chairman Jerome Powell suggested openness to further rate cuts and said the time has come to allow the Fed's asset holdings to begin to expand again.
Powell also said the Fed would "soon announce measures to add to the supply of reserves over time."
However, indexes soon reversed course to fall further in late trading after the U.S. State Department said it is imposing visa restrictions on Chinese officials for treatment of Muslims in Xinjiang.
The interest-rate sensitive financials index (SPSY) was down more than 1%.
Market expectations have increased that the Fed will cut interest rates by a quarter percentage point in October, according to CME Group's FedWatch tool.
Those bets were bolstered on Tuesday by data that showed U.S. producer prices unexpectedly fell in September.
"The overall tone from the Fed is showing a little more concern," said Willie Delwiche, investment strategist at Baird in Milwaukee.
"The Fed is trying to send a message of 'we are paying attention and we are on top of this, and we are going to focus on the mission and not the politics,'" he added.
At 3:17 p.m. ET, the Dow Jones Industrial Average (DJI) fell 213.3 points, or 0.81%, to 26,264.72, the S&P 500 (SPX) lost 31.08 points, or 1.06%, to 2,907.71 and the Nasdaq Composite (IXIC) dropped 90.75 points, or 1.14%, to 7,865.55.
A Bloomberg report that Washington was moving ahead with efforts to limit capital flows to China and the inclusion of some top Chinese startups on a blacklist also weighed on stocks.
The trade blacklist was widened to include Chinese video surveillance firm Hikvision (SZ:002415) and surveillance equipment maker Zhejiang Dahua Technology (SZ:002236) among others, drawing a sharp rebuke from Beijing.
The Philadelphia Semiconductor index (SOX) dropped 1.7%.
U.S. and Chinese deputy trade negotiators were to meet in Washington for a second day of talks on Tuesday, with high-level discussions scheduled to start on Thursday.
Declining issues outnumbered advancing ones on the NYSE by a 2.09-to-1 ratio; on Nasdaq, a 2.22-to-1 ratio favored decliners.
The S&P 500 posted 6 new 52-week highs and 20 new lows; the Nasdaq Composite recorded 9 new highs and 138 new lows.