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NEW YORK (Reuters) - The S&P 500 fell for a third day on Tuesday but pared losses late in the day after the parliament of Cyprus rejected a proposed tax on bank deposits.
The proposed tax on savings in banks had been a condition of a European bailout. When the Cypriot parliament rejected the tax, the decision eased worries that savers will begin withdrawing funds. At the same time, it left efforts to rescue the country - the latest casualty of the euro-zone debt crisis - up in the air.
"Regardless of the vote in Cyprus, we still have the problem. No one knows: 'What is the Cypriot financial restructuring going to look like?'" sad Nicholas Colas, chief market strategist at the ConvergEx Group, in New York.
Banks in Cyprus will remain closed until Thursday.
The S&P 500's retreat followed a long streak of gains where the index came close to hitting its all-time closing high set in 2007. The S&P 500 is still on track to post its best quarter in a year. The benchmark S&P 500 is up 8.4 percent for the year, while the Dow is up 10.3 percent.
Energy shares led the day's decline following a drop in oil prices and a slide in the shares of oil services companies. The PHLX oil services sector index .OSX dropped 2 percent. Shares of Schlumberger Ltd (SLB.N) fell 3.1 percent to $73.98. The stock of Halliburton (HAL.N) dropped 2.7 percent to $39.62.
The Dow Jones industrial average .DJI edged up 3.76 points, or 0.03 percent, to close at 14,455.82.
After the bell, shares of Adobe Systems Inc (ADBE.O), the maker of Photoshop and Acrobat software, rose 5.6 percent to $43.05 after its results beat analysts' estimates. The stock ended the regular session at $40.75, down 0.8 percent.
In Tuesday's volatile trading, the Dow made a swing of 132.25 points from its session high to its intraday low. The Nasdaq made a swing of 47.18 points from its intraday high to its session low.
The CBOE Volatility Index .VIX or VIX, Wall Street's favorite barometer of fear, rose 7.71 percent to end at 14.39. Earlier, the VIX hit an intraday high of 15.40 - up 15.27 percent from Monday's close.
During the session, the S&P 500 traded as low as 1,538.57. The S&P's swing from its intraday high to that session low covered 18.68 points.
Strategists expect the S&P 500 to still break above its record high reached in October 2007, but they expect the rally to slow from there. A Reuters poll of equity strategists surveyed over the past week put the S&P 500 at 1,600 by year end, above its October 9, 2007, all-time closing high of 1,565.15. The Dow initially surpassed its 2007 record levels on March 5 and then set nominal record closing highs on subsequent session through the close on March 14.
On Monday, Goldman Sachs increased its year-end target for the S&P 500 to 1,625 while Morgan Stanley raised its target to 1,600.
The day's declining shares included Electronic Arts Inc (EA.O), which fell 8.3 percent to $17.15 a day after the video games publisher's chief executive resigned after six years at the helm, saying he held himself accountable for missed targets.
Shares of Cliffs Natural Resources Inc (CLF.N) fell 6.6 percent to $20.33 after Goldman Sachs cut its price target for the iron ore producer's stock, citing a bleak outlook for the steelmaking material.
Among the day's gainers, Walgreen Co WAG.N and partner Alliance Boots ABN.UL said they signed a 10-year deal with AmerisourceBergen (ABC.N) and will take a stake in the distribution company, ending Walgreen's current contract with Cardinal Health Inc (CAH.N).
Walgreen shares hit $45.80, their highest since September 2007, and closed at $44.74, up 5.4 percent. Amerisource gained 3.6 percent to $50.06. In contrast, Cardinal lost 8.2 percent to $42.35.
European bank shares extended Monday's decline, with the sector's index .SX7P down 2.1 percent on Tuesday.
"Whether the deposit levy occurs or not, the fact that it was agreed to by the EU means that claims on private property are not out of bounds, which pretty much says that nothing is out of bounds," said Fred Copper, senior portfolio manager, international equity, at Boston-based Columbia Management, in reference to the banking crisis in Cyprus.
U.S. economic data added to upbeat views on the housing sector. Housing starts data showed that groundbreaking to build new U.S. homes climbed in February and new permits for construction rose to their highest since 2008, in a sign the U.S. housing market's recovery was building momentum.
The PHLX housing sector index .HGX rose 0.3 percent to end at 191.79, after earlier climbing to 194.41 - its highest level since late July 2007.
Volume was roughly 6.8 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.
Decliners outpaced advancers on the NYSE by about 17 to 13, while on the Nasdaq, seven stocks fell for every five that rose.
Additional reporting by Rodrigo Campos and Ellen Freilich; Editing by Kenneth Barry and Jan Paschal