Stocks erased most of their gains to finish flat Tuesday following reports that former Greek Prime Minister Lucas Papademos said preparations for Greece's exit from the euro zone are being considered.

Still, all three major averages managed to end off their worst levels after an initial sharp drop following the report.

Papademos also cautioned that dropping the single currency would have "catastrophic" economic consequences for the debt-ridden nation and the rest of the euro zone.

The Dow Jones Industrial Average erased 1.67 points, or 0.01 percent, to close at 12,502.81. Alcoa led the Dow laggards, while JPMorgan and BofA closed higher.

The S&P 500 eked out a gain of 0.64 points, or 0.05 percent, to end at 1,316.63. The Nasdaq slipped 8.13 points, or 0.29 percent, to finish at 2,839.08.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, ended above 22.

The euro extended losses against the greenback following the news to trade well below $1.27.

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