U.S. crude settled down 4.6 percent at $39.94 a barrel, below $40 for the first time in three months. Trade in oil was volatile as investors reacted to headlines on production ahead of the OPEC meeting later this week.  Weekly crude oil inventories showed an unexpected rise of 1.2 million barrels.  Together, Chevron and Exxon Mobil contributed the most to declines in the Dow.  "Crude is such a big part of this (selling) right now," said JJ Kinahan, chief strategist at TD Ameritrade.  The Dow transports closed down 2.1 percent to below the index's 50-day moving average, with Kansas City Southern leading decliners.  Check out CNBC's special report on energy ahead of OPEC  Earlier, the major averages traded mixed, while the U.S. dollar index spiked to hit its highest level since April 2003 after Yellen said in prepared remarks that the U.S. economy has come a long way, but the Fed's decision on rates could still be swayed by data before its December meeting.  Yellen also testifies Thursday morning before the Congressional Joint Economic Committee.  "I think people are realizing that a quarter-point rise in the federal funds rate isn't the end of the world," said Bryce Doty, senior fixed income portfolio manager at Sit Investment Associates.  The U.S. dollar index dipped below 100 after earlier touching a high of 100.51, topping the 100.39 high from March to briefly trade at levels not seen in more than 12 years.  The index held near 100.00 in late trade, with the euro recovering the $1.06 level, while the yen traded near 123.24 yen against the dollar.  Gold settled down $9.70 at $1,053.80 an ounce, off session lows of $1,049.40 an ounce, its lowest level since Oct. 2009.  Read MoreFed's Lockhart: Upcoming FOMC meeting may be 'historic'  "The Fed has a sort of an unspoken agreement that they're going to give a consistent message going into (the Fed meeting," said Sharon Stark, managing director and fixed income strategist at D.A. Davidson.  "The employment report on Friday is going to be important. If it's weaker than expected then there may be questions about maybe the Fed won't hike, but I don't think (that would derail the Fed) given the strength of the ADP report," she said.  The Federal Open Market Committee meets Dec. 15 to 16 and could raise short-term interest rates for the first time in nearly a decade.  "Given past rhetoric, the fading of financial market instability and Chinese concerns, and generally robust U.S. domestic data, her likely goal will be to elevate the market's expectation for a December rate hike from just above 70 percent to close to 90 percent. In this way, the Fed will manage to avoid too much disruption on the Dec. 16 decision day," RBC Global Asset Management Chief Economist Eric Lascelles said in a note.  Investors are also looking ahead to the European Central Bank's decision on monetary policy due Thursday morning ET.  "It's a lot to talk about," said Maris Ogg, president at Tower Bridge Advisors. "I don't think any of it's terribly important. We probably know what's going to happen."  Markets generally expect further easing from the ECB. The probability for a December hike in the United States has held steady above 70 percent, according to CME's FedWatch tool.  San Francisco Fed President John Williams said in a Reuters report Wednesday it will take a few years to get short-term U.S. interest rates, now near zero, back up to the "new normal" of about 3.5 percent,  Ahead of Friday's November jobs report, ADP data showed November private payrolls topped expectations at 217,000.  Revised third-quarter productivity rose 2.2 percent, while unit labor costs rose 1.8 percent.
U.S. stocks closed lower, with selling accelerating in late afternoon trade after oil broke below $40 a barrel and there was more evidence of a weak manufacturing sector in the Fed's Beige Book.