Stocks fell on Wednesday as lower oil prices hurt energy shares and caution before the Federal Reserve's policy decision offset optimism from a report of a potential takeover in the technology sector.

Losses on Nasdaq, however, were limited by a 65 percent run-up in the shares of Sun Microsystems after the Wall Street Journal reported that International Business Machines Corp was in talks to buy the computer maker for at least $6.5 billion.

On the other hand, a 2.3 percent drop in the shares of IBM weighed on the Dow. The technology bellwether, with more than $120 billion in market capitalization, is among the blue-chips whose heft dictates the Dow and the broader market's direction.

Exxon Mobil was the second worst Dow drag behind IBM, falling 2.3 percent to $67.51 as U.S. crude prices fell almost 4 percent.

While we had a nice up-day yesterday, I think it's pretty clear that some level of giveback has to be undergone, said Dan Greenhaus, market analyst at Miller Tabak & Co in New York, referring to a run-up in the market that followed a drop to 12-year lows earlier this month.

You had a couple of pieces of information this morning including news on IBM. These days every M&A deal is encouraging, but again IBM is an incredibly strong company and Sun Micro is an incredibly weak company.

The Dow Jones industrial average <.DJI> fell 98.61 points, or 1.33 percent, to 7,297.09. The Standard & Poor's 500 Index <.SPX> shed 8.39 points, or 1.08 percent, to 769.73. The Nasdaq Composite Index <.IXIC> dipped 5.56 points, or 0.38 percent, to 1,456.55.

Investors were now focusing on the U.S. central bank's policy meeting, which will yield a statement at around 2:15 p.m. EDT.

With the Fed already having cut interest rates close to zero, attention was on whether it would commit itself to buying long-dated government debt as an additional measure to revive the economy.

Concerns about the fallout from the mounting furor over bonuses paid to executives of embattled insurer American International Group also weighed on sentiment. Some investors worry that this might snag efforts in Washington to stabilize the economy.

Sun Micro, up 65.2 percent to $8.21, ranked as the Nasdaq's second top boost behind Apple Inc , up nearly 2 percent. Another standout was design software maker Adobe , up more than 7 percent, after several brokerages raised their price targets on the stock.

IBM shares declined 2.3 percent to $90.79.

Also heading lower was Morgan Stanley , off 6.3 percent to $22.30, after J.P. Morgan said the company needed more capital.

(Editing by Chizu Nomiyama)