US stock markets finished sharply lower on Tuesday and short-term Treasury yields shot up as investor jitters grew over a lack of progress in U.S. debt limit talks.

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Representatives of U.S. President Joe Biden and congressional Republicans ended another round of debt ceiling talks on Tuesday, as the deadline drew closer to raise the government's $31.4 trillion borrowing limit or risk default.

Debt limit worries pushed yields on one-month Treasury bills to record highs at 5.888%.

Investors are also waiting for minutes from the Federal Reserve's May 2-3 meeting, due on Wednesday, to assess the central bank's next likely move on interest rates.

Regional Fed Presidents James Bullard and Neel Kashkari on Monday indicated that the U.S. central bank may need to continue hiking rates if inflation remains high.

Michael Wilson, Morgan Stanley's equity strategist, said a U.S. debt default is not priced into the market. Even if the two sides agree on a deal, it could still have implications for economic growth, he said.

"If they come to an agreement on the debt ceiling, there will be some concessions on the fiscal spending. It's an issue for growth," Wilson said. "Is that going to be an immediate impact, or will it be later? We think there's a bit of both. At the end of the day, there's no positive tradeoff."

The S&P 500 benchmark index (.SPX) declined 1.12% to end at 4,145.58 points. The Nasdaq Composite (.IXIC) fell 1.26% to 12,560.25 points, and the Dow Jones Industrial Average (.DJI) slid 0.69% to 33,055.51 points.

Volume on U.S. exchanges was relatively light, with 10.3 billion shares traded, compared to an average of 10.6 billion shares over the previous 20 sessions.

[Traders work on the floor of the NYSE in New York]
A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 22, 2023. REUTERS/Brendan McDermid

Strategists polled by Reuters see the S&P 500 ending the year at 4,150 points, down slightly from Monday's close of 4,192.63.

Helping limit larger losses, the S&P Global data showed U.S. business activity rose to a 13-month high in May, lifted by strong growth in the services sector.

The report was the latest sign that the economy held its momentum early in the second quarter despite rising risks of a recession.

The Commerce Department's April personal consumption expenditure (PCE) index reading, the Fed's preferred inflation gauge, is due on Friday.

Broadcom Inc (AVGO.O) advanced 1.2% after the chipmaker entered into a multi-billion-dollar deal with Apple Inc (AAPL.O) to use chips made in the United States. Apple shares fell 1.5%.

Zoom Video Communications (ZM.O) dropped over 8% after the video conferencing platform reported its slowest quarterly revenue growth.

Among retail earnings, Lowe's Companies Inc (LOW.N) cut its annual comparable sales forecast, as demand dwindles for home improvement goods. Lowe's ended up 1.7%.

Shares of regional lenders extended gains from Monday, led by a 7.9% gain in PacWest Bancorp (PACW.O), with the KBW regional banking index <.KRX> rising 0.9%.

Declining stocks outnumbered rising ones within the S&P 500 (.AD.SPX) by a 3.5-to-one ratio.

The S&P 500 posted three new highs and one new low; the Nasdaq recorded 90 new highs and 70 new lows.