Though the Fed did leave the door open to further easing next year, as it has done after recent meetings, it gave no indication it was any more inclined to provide new economic stimulus.
The Fed left monetary policy on hold and said financial market turbulence posed threats to economic growth. It also characterized the U.S. economy as expanding moderately despite an apparent slowing in global growth, though it added that unemployment remains elevated and housing activity depressed.
The Fed "gave the economy a very slight upgrade, but it sort of took the wind out of domestic equities, probably because some were hoping that they would hint at another (quantitative easing)-like program," said Robert Phipps, a director at Per Stirling Capital Management in Austin, Texas.
Wall Street was higher for much of the volatile session, but turned negative after the Fed announcement. The losses accelerated going into the close and the S&P 500 briefly fell under its 50-day moving average. A close under that could signal more losses to come.
The Dow Jones industrial average <.DJI> was down 66.45 points, or 0.55 percent, at 11,954.94. The Standard & Poor's 500 Index <.SPX> was down 10.74 points, or 0.87 percent, at 1,225.73. The Nasdaq Composite Index <.IXIC> was down 32.99 points, or 1.26 percent, at 2,579.27.
The disappointment with the Fed came at the tail-end of a trading session that was largely focused on Europe, especially after German Chancellor Angela Merkel rejected any suggestion of raising the limit on Europe's bailout fund.
Investors had been closely eyeing developments on the fund, the European Stability Mechanism (ESM), which will go into effect from the middle of next year and replace the current European Financial Stability Fund. The ESM will have an effective lending capacity of 500 billion euros.
"The developments in Europe don't address the region's short-term liquidity issues, so the next step is trying to figure that out," said Randy Frederick, director of trading and derivatives for Charles Schwab in Austin, Texas.
"That uncertainty is why our markets have been pressured lately. We're still all about Europe here."
Consumer-related stocks were the worst performers. Shares of Best Buy <BBY.N> tumbled 15.5 percent to $23.73 after the electronics retailer reported a quarterly profit below expectations as bigger discounts squeezed margins. The S&P consumer discretionary sector <.GSPD> fell 2 percent.
U.S. government data showed U.S. retail sales rose less than expected in November as a drop in receipts for food and beverages weighed against stronger sales of motor vehicles, tempering expectations of a strong holiday shopping season.
U.S. crude oil futures prices rose more than 2 percent, advancing above $100 a barrel, with traders citing tension between the West and Iran as a possible trigger. The S&P energy index <.GSPE> was up more than 2 percent at its session high but was unable to maintain its gains and closed lower.
The only sector to close higher was utilities <.GSPU>, considered a defensive play.
Volume was light, with about 7.28 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's daily average of 8.47 billion. More than two stocks fell for every one that rose on the New York Stock Exchange, while on the Nasdaq, about 74 percent of issues closed lower.
(Reporting by Ryan Vlastelica)