The developments came after the most recent round of sanctions were imposed on Russia by the U.S. and Europe last week. Russia called Tuesday for a meeting of the U.N. Security Council to discuss the situation in Ukraine.
The Ukraine-Russia tensions were "outweighing any good economic data" that investors had to work with Tuesday, said Tom di Galoma, a bond trader at ED&F Mann Capital.
The Dow lost 139.81 points, or 0.8 percent, to 16,429.47, the lowest level for the index since mid-May. The Standard & Poor's 500 index lost 18.78 points, or 1 percent, to 1,920.21 and the Nasdaq composite fell 31.05 points, or 0.7 percent, to 4,352.84.
The tensions between Russia and Ukraine have been a headache for investors for months now. However the stakes are higher than before, investors say.
With winter a few months away, Europe's recovering economy remains dependent on Russian natural gas for heat and electricity. Germany imports nearly all its natural gas from Russia, and France also gets a significant amount of its energy needs from Russia.
"Europe's economy is far more exposed to Russia than the U.S.," said Randy Frederick, a managing director at Charles Schwab.
Tuesday's losses add to what has been a tough couple of weeks for U.S. markets. The S&P 500 fell 2.7 percent last week, its worst five-day performance since June 2012. While the market did recover some Monday, Tuesday's losses wiped out those gains, leaving the Dow and S&P 500 lower for the week.
International events have been in the forefront of investors' minds for the last two weeks, and have been a major reason stocks have fallen. There was the near-failure of a Portuguese bank, Argentina defaulting on its bonds, the Israeli-Gaza conflict on top of the tensions between the U.S., Europe and Russia over Ukraine. Strategists say investors are in a wait-and-see mode.
"Once these geopolitical issues calm down, we should move higher from here," Frederick said.
One sign of investor nervousness can be seen in the VIX, a financial instrument that gauges how much stock market volatility investors expect in the future. The VIX jumped 10 percent to 16.71 on Tuesday. The index is trading at levels not seen since April and was as low as 11 just two weeks ago. The higher the index goes, the more turbulence investors expect to see in the future.
Investors did get two positive reports on the U.S. economy, but it was not enough to move the market higher.
The Institute for Supply Management said the U.S. services sector expanded in July more than expected. The ISM survey came in at 58.7 versus the 56.5 economists had predicted. June factory orders also rose more than expected, rising 1.1 percent compared to the 0.6 percent increase economists were looking for.
Among individual stocks, Target dropped $2.67, or 4.4 percent, to $58.03 after the company lowered its second-quarter earnings forecast. Target said the massive data breach the company experienced last year was costing far more than previously expected. Shoppers remain cautious about shopping at the store, Target said.
Twenty-First Century Fox rose 7 percent in after-market trading after Rupert Murdoch's media company said it was pulling its bid to buy Time Warner. Shares of Time Warner dropped 11 percent in after-market trading following the news.