Stocks fell sharply on Tuesday after a top U.S. trade official indicated that higher tariffs on Chinese goods are coming later this week, disappointing traders who hoped President Donald Trump's weekend tweet threat was just a negotiation tactic.

The Dow Jones Industrial Average fell 473.39 points, or 1.79%, to 25,965.09 after plunging as much as 648.77 points at its low of the day, while the dropped 1.65% to 2,884.05. It was the Dow's biggest drop since January 3. The Nasdaq Composite dropped 1.96% to 7,963.76. All 30 of Dow components fell and all 11 S&P sectors traded lower in the broad sell-off.

Shares of trade bellwethers Caterpillar and Boeing fell 2.26% and 3.87%, respectively. Boeing also broke below its 200-day moving average for the first time since January. Chipmakers, especially vulnerable if China retaliates, led the tech sector lower as Nvidia dropped 3.75%. Apple also fell 2.7%.

U.S. Trade Representative Robert Lighthizer told reporters that the U.S. will increase levies on Chinese imports on Friday.

Lighthizer's comments "further increased the likelihood of a tariff step up," Keith Parker, a strategist at UBS, said in a note. A full-blown trade war would shave off 45 basis points from global economic growth, while China's GDP would take a hit of between 1.2% and 1.5%.

"We still see a trade war as low probability given the next tranche of tariffs would hit US consumer goods, but nevertheless it would have a big negative impact," he said.

Lighthizer made his remarks after President Donald Trump tweeted he would raise current tariffs 10% on $200 billion of Chinese goods to 25% on Friday. He also threatened to impose an extra 25% levy on another $325 billion of Chinese goods "shortly."

Trump's tweets initially sent the market reeling on Monday. The Dow fell as much as 471 points while the Nasdaq dropped 2% at one point. However, equities rebounded to close well off their lows on news that a Chinese delegation would come to Washington for talks and as traders bet that Trump's tweet was just bluffing.

But Lighthizer's comments dashed those hopes. The selling on Tuesday accelerated after the Dow broke through Monday's lows.

The Cboe Volatility Index, a measure of the 30-day implied volatility of the S&P 500 known as the "VIX" or the "fear gauge," hit a fresh high of 21.09 on Tuesday, its highest level since January 22.

"I think this is a big masquerade by the administration. I think they're preparing the market for the worst-case scenario but a trade deal is probably going to happen," said Peter Cardillo, chief market economist at Spartan Capital Securities. "I still think we'll get some sort of positive announcement on Friday."