Stocks in Europe and on Wall Street dropped amid concern about the escalating chaos in Libya. Oil prices continued their climb.
At least 250 people died in the Libyan capital Tripoli overnight, al-Jazeera reported. The turmoil in Libya, holder of Africa's largest oil reserves, comes after last month's ouster of Tunisia's president and this month's fall of Egyptian President Hosni Mubarak.
The Dow Jones Industrial Average fell 0.54 per cent, the Standard & Poor's 500 Index shed 0.82 per cent and the Nasdaq Composite Index dropped 1.18 per cent. The Stoxx Europe 600 Index lost 0.9 per cent, falling for a third straight session.
"The market certainly needed a breather and this sure is a good reason," Jack De Gan, chief investment officer at Harbor Advisory in Portsmouth, New Hampshire, told Reuters.
"But I don't see this as a significant correction as long as the unrest doesn't spill over to a much bigger oil producing country. The strength of the rally is still there."
The latest US economic data provided a mixed picture. On a bright note, US consumer confidence rose more than expected to a three-year high in February.
The Conference Board's index of sentiment rose to 70.4, from
64.8 the prior month. Economists had forecast the gauge would be little changed at 65.5, according to the median forecast in a Bloomberg News survey.
However, separate data showed single-family home prices fell in December. The S&P/Case Shiller composite index of 20 metropolitan areas fell 0.4 per cent in December from November on a seasonally adjusted basis, which was in line with expectations.
Companies like Wal-Mart Stores Inc, which posted its seventh straight drop in US sales, and Barnes & Noble Inc, which suspended its dividend to conserve cash and invest in digital reading, fell out of favour.
Instead, investors sought the relative safety of government debt, pushing US Treasuries higher.
The yield on the 10-year Treasury fell 11 basis points to 3.48 per cent at 11.19am in New York, according to BGCantor Market Data.
"The backdrop for Treasuries is fairly strong given the potential for regime changes in the Middle East," Tom di Galoma, head of US rates trading at Guggenheim Partners, a New York-based brokerage for institutional investors, told Bloomberg News.
"We could see some short-term selling before the week's auctions as the market hasn't set up for it yet, but the Middle East events are a watershed moment, and will keep uncertainty in the market."
The CBOE Volatility index, the market's so-called fear gauge, jumped 19.8 per cent.
The euro dropped as much as 1 per cent on the day to US$1.3527, before recovering to US$1.3635 by 1043 GMT.
Meanwhile, oil prices strengthened to the highest level in 2 and a half years as investors worried the uprising in Libya could spread to other major oil producers in the Middle East and North Africa.
Brent crude oil futures for April delivery were US$1.12 higher at US$106.86.
"Libya alone doesn't produce so much oil that there would be a supply shortage ... even if there was a total collapse," Carsten Fritsch, an analyst at Commerzbank, told Reuters.
"It produces around 1.6 million barrels of oil per day, and Opec has spare capacity of up to 6 million barrels, so it is more fears that this might spread to places like Algeria, Kuwait or the United Arab Emirates," he said.
Gold fell for the first session in seven. Spot gold was 0.8 per cent lower at US$1,394.14 an ounce at 1025 GMT. It hit a seven-week high on Monday.