Oil weighs on U.S. stocks; ECB hopes boost Europe

NEW YORK (Reuters) - The U.S. stock market closed lower for a third straight session on Tuesday, reversing earlier gains as continued weakness in oil spurred further selling in the energy sector, while the U.S. dollar rose on hopes for stimulus from the European Central Bank.

The day's trade was volatile, with the S&P 500 moving between a gain of 1.4 percent and a drop of 1 percent. The benchmark index ended off its lows of the day, but eight of the 10 primary index industries finished in negative territory.

Brent crude fell 0.7 percent, approaching a near six-year low as the United Arab Emirates defended OPEC's decision not to cut output and traders wondered when a six-month-long price rout might end.

Energy shares <.SPNY> fell 0.7 percent in the United States while the material sector <.SPLRCM> was off 1.2 percent. The recent weakness in oil has been a major contributor to both volatility and weakness in stocks.

"We're seeing commodity prices continue to go down, not only in oil but across the board. So it's this fear of lower commodity prices leading to global deflation which is leading this nervousness," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

Fears of a deflationary tailspin have raised expectations that the ECB could launch a large-scale program of government bond-buying soon, possibly at its Jan. 22 policy meeting.

"It's no secret that Europe is slowing down and that more stimulus is necessary," said Michael O?Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut. "I'd say the odds of our getting more are very good, above 90 percent, but there's still a lot of uncertainty about what form it will take, and whether the ECB will be able to act in January."

The pan-European FTSEurofirst 300 index <.FTEU3> ended 1.4 percent higher while the MSCI International ACWI Price Index <.MIWD00000PUS> rose 0.2 percent.

The Dow Jones industrial average <.DJI> fell 27.16 points, or 0.15 percent, to 17,613.68, the S&P 500 <.SPX> lost 5.22 points, or 0.26 percent, to 2,023.04 and the Nasdaq Composite <.IXIC> dropped 3.21 points, or 0.07 percent, to 4,661.50.

Alcoa Inc late Monday reported fourth-quarter earnings that beat expectations, though shares fell 2.3 percent on Tuesday to $15.79. The aluminum maker is no longer a Dow component but as one of the first major names to report it is seen as informally setting the tone for the earnings season.

The U.S. dollar index <.DXY> rose 0.3 percent against a basket of currencies, and gained 0.5 percent against the euro at $1.1771. It rose 0.4 percent against the yen.

Euro zone government bond yields fell on the prospect of looser ECB policy and many euro zone countries sold debt to lock in ultra-low borrowing costs.

The benchmark 10-year U.S. Treasury note traded up 2/32 in price to yield 1.9051 percent.

Copper prices sank 2.6 percent, on track for their fifth straight daily decline and their biggest one-day drop since November despite strong trade data from China and signs of physical demand.

Gold fell 0.2 percent while silver added 2.7 percent.

(Additional reporting by Caroline Valetkevitch; Editing by James Dalgleish and Meredith Mazzilli)