U.S. stocks closed mostly lower Thursday after a dramatic session that saw the Dow Jones Industrial Average plunge more than 700 points at one point on fears that the arrest of a Huawei executive would reignite trade worries.

However, the market clawed back most of its losses on a report that the Federal Reserve may turn more accommodative.

The Dow Jones Industrial Average DJIA, -1.92% declined 79.40 points, or 0.3%, to 24,947.67, though the index was down by as much as 785 points at the lowest point. The S&P 500 index SPX, -2.37% dropped 4.11 points, 0.2%, to 2,696.95 and the Nasdaq Composite Index COMP, -3.01% fell 29.83 points, or 0.4%, to 7,188.26.

The afternoon rebound put the Dow and the S&P back into the positive for 2018, while the Nasdaq built on its gains to rise 4.1% for the year.

What drove the market?

Investors were rattled by news that Canadian authorities had arrested Meng Wanzhou, the chief financial officer of Huawei Technologies, at the request of U.S. authorities for allegedly violating sanctions against Iran. The arrest, which was made on Dec. 1, comes as the U.S. has taken several steps to restrict the Chinese technology giant, and has tried to persuade international allies to do the same.

In a sign of how unsettled investors were, stock-index futures dropped so precipitously Thursday that the Chicago Mercantile Exchange triggered circuit breakers to avoid worse losses. Those futures spiked down to 2,659, a drop of 1.9% before the CME stopped trading briefly to try to calm the market, said Chris Weston, head of research at Pepperstone.

S&P 500 futures tumble sharply at Thursday’s reopen FactSet

The latest development comes amid an already shaky backdrop for trade relations between the U.S. and China. Doubts surrounding the weekend tariff moratorium announced at the G-20 summit between the two sides and ominous developments in the bond market drove sharp losses for stocks Tuesday.

However, a Wall Street Journal report that the Fed may consider a pause after raising interest rates later this month helped the market bounce back Thursday afternoon.

“Officials still think the broad direction of short-term interest rates will be higher in 2019,” according to the Journal report. “But as they push up their benchmark, they are becoming less sure how fast they will need to act or how far they will need to go and want to assess how the economy is holding up under moves they’ve already made.”

Market participants are also monitoring a two-day meeting of the Organization of the Petroleum Exporting Countries in Vienna, which is slated to wrap up Friday. Crude-oil prices renewed their descent after the Saudi energy minister proposed a smaller-than-expected cut to production, but added that the oil cartel hadn’t yet agreed to any production declines.

The recent 30% drop in oil prices from their October highs is being interpreted by some market participants as a sign of slowing global growth, given oil’s central role as an input for a range of economic activity.

What data were in focus?

Investors were also facing a heavy load of economic data:

What were strategists saying?

Frank Cappelleri, executive director of equity sales and trading at Instinet LLC, credited technology stocks for some of the market’s recovery, noting that several tech-related ETFs turned higher during the session.

“This signaled that there was buy interest,” he said. “One thing has become clear the last few weeks, rallies have faded near SPX 2,800, and intense selloffs have been bought near 2,600. The key now will be seeing real upside follow through.”

“There’s not much incentive to be heroic and step in here expecting some kind of rally in the next two weeks,” before liquidity dries up during the holiday season, Aaron Clark, portfolio manager with GW&K Investment Management, told MarketWatch.

“There won’t be much fundamental news until earnings start up again in January, so whether markets move up or down in the next two weeks is a crapshoot,” he said, arguing that many investors will simply wait on the sidelines until they have more information that could help make “a rational case” for where markets are headed in 2019.

“The timing of the arrest is key here. Markets are already incredibly nervous over slowing economic growth thanks to the inverted U.S. yield curve. Relations between the U.S. and China were supposed to be on the mend after a productive G-20. However, the arrest has the potential to shatter very fragile U.S.-Sino relations which will weigh further on global trade and growth concerns,” said Jasper Lawler, head of research at London Capital Group, in a note to clients.

And “despite recent heavy selloffs, the bottom isn’t in sight and the markets have further to fall. The big swings of late are representative of a very jittery market,” added Lawler.

What stocks were in focus?

Stocks perceived to be vulnerable to the U.S.-China trade war were among notable losers. Apple Inc. AAPL, -4.19% dropped 1.1%, while Chinese internet firm JD.com Inc. JD, -0.54% was down 1% and Baidu Inc. BIDU, -0.89% fell 1.1%.

Semiconductor firms were also hurt, with Xilnix Inc. XLNX, -2.72% down 2.5% and Broadcom Inc. AVGO, -2.76% off 2.1%.

Shares of Children’s Place Inc. PLCE, -7.59% plunged 13%, hitting 13-month lows earlier, after the retailer cut its earnings and margin outlook for the full year.

Costco Wholesale Corp. COST, +0.05% rose 3% after the company reported fiscal fourth-quarter same-store sales rose 8.8%, above analysts estimates.

Shares of Sears Holdings Corp. SHLDQ, +1.36% gained 3.9% after Eddie Lampter's ESL Investments Inc. placed a bid of $4.6 billion to purchase what remains of the retailer.

What were other markets doing?

Asian stocks fell sharply across the board, with the bulk of losses hitting tech stocks, and Hong Kong’s Hang Seng Index HSI, +0.10% bearing the brunt, dropping 2.5%. European stocks SXXP, +0.55% also traded lower across the board.

Benchmark U.S. crude US:CLF9 fell sharply while gold prices US:GCG9 settled mostly flat, and the ICE Dollar Index DXY, +0.37% traded lower.

—Barbara Kollmeyer contributed to this article