Stocks ended near the lowest levels of the day after the Fed said it will shift $400 billion from short-term Treasuries into long-term Treasuries in an effort to boost lending and spur the economy.
The Dow Jones industrial average (INDU) dropped 284 points, or 2.5%, with all but one of the blue-chip index's 30 components closing in the red.
The S&P 500 (SPX) fell 35 points, or nearly 3%. Even the tech-heavy Nasdaq composite (COMP), which had been trading higher most of the day, closed down with a drop of 52 points, or 2%.
"Operation Twist was priced into the market, and investors needed a twist on the twist -- something more," said Doug Roberts chief investment strategist for Channel Capital Research.
While the Fed said it will also reinvest the proceeds from maturing mortgage-backed securities into more mortgage-backed securities, Roberts said that additional step is still lacking.
What would help satisfy financial markets is if the Fed were to bite the bullet and pump more money into the economy with another round of Treasury buying, or QE3, he added.
But experts said the Fed, which is running out of policy tools, will probably hold back from expanding its balance sheet unless investors and consumers grow warier.
"By not mentioning QE3, it definitely appears that the central bank is saving their few remaining bullets in case the volatility in financial markets intensified or the U.S. economy falls into recession," said Kathy Lien, director of currency research at Global Forex Trading.
Aside from the Fed, investors remained on edge over the developing situation in debt-stricken Greece.
Evangelos Venizelos, the Greek finance minister, told Parliament that more budget cuts would be needed in order for the country to get back on track.
Venizelos had held two days of talks with officials from the European Union, European Central Bank and International Monetary Fund in an effort to gain consensus on measures needed to secure the next installment of Greece's bailout. Talks are expected to continue this weekend in Washington, D.C., where the IMF and World Bank are meeting.
"There have been a lot of conversations, and statement of support for Greece, but the market's have heard enough. We need action," said Rob Lutts, chief investment officer at Cabot Money Management. "Investors want to know and see who will put up money to bailout Greece and how much Europe's banks will lose in the event of a restructuring or default."
he dollar rose against the euro, the Japanese and the British pound.
Oil for November delivery slipped $1.00 to settle at $85.92 a barrel.
Gold futures for December delivery fell $1.00 to settle at $1,808.10 an ounce.
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