Declines in commodities such as gold, silver and oil dragged stocks lower. Sears Holdings Corp plunged more than 9 per cent after forecasting a loss for the first quarter.
In early afternoon trading on Wall Street, the Dow Jones Industrial Average fell 0.29 per cent, the Standard & Poor's 500 Index shed 0.67 per cent and the Nasdaq Composite Index dropped 1.18 per cent.
The CBOE Volatility Index, Wall Street's so-called fear gauge, soared for a second day, climbing 7 per cent on Tuesday, though it remains near historical lows.
"People are taking some chips off the table," Michael Strauss, who helps oversee US$27 billion as chief investment strategist at Commonfund in Wilton, Connecticut, told Bloomberg News.
"We've had good numbers, but we also had a good run in the equity markets. In addition, there's concern about the path of inflation and interest rates. Investors are treating things here more cautiously."
Investors lowered their exposure to equities in April, buying bonds and turning to safe-haven cash amid concern about the pace of global economic growth, Reuters polls showed on Tuesday.
Surveys of 56 leading investment houses in the United States, Europe ex-UK, Japan and Britain showed exposure to stocks falling to 51.3 per cent in the month from 52.6 per cent in March, Reuters said.
Bonds rose to 34.6 per cent from 34.0 while cash was lifted to 5.1 per cent in a balanced portfolio from 4.7 per cent a month earlier.
It was the highest exposure to cash since September, around the time stock markets began rallying on prospects for renewed asset buying by the US Federal Reserve.
"We're moving into seasonally weak conditions [for equities] with May and June here, and the macro story may be at risk if oil prices shoot to US$130 per barrel or so. There are too many things that can go wrong," Keith Wirtz, chief investment officer at US firm Fifth Third Asset Management, told Reuters.
The US dollar fell, reaching a record low against the Swiss franc, amid clear signals the Fed would keep rates steady. The European Central Bank is expected to lift interest rates again this year, though traders expect it to stand pat when it meets this week.
The greenback fell to a record of 0.8595 Swiss francs and declined 0.3 per cent to 80.98 yen.
The euro rose 0.4 per cent to US$1.4874.
"The story has been about divergent rate expectations," Wells Fargo strategist Vassili Serebriakov told Reuters. "The Fed is on hold and now the [Bank of England] may be coming out of the picture. The ECB is uniquely the only major central bank expected to raise rates, and that benefits the euro."
Oil prices fell, along with the greenback. India's bigger-than-expected interest rate increase added to concern about global demand.
"There are concerns that higher interest rates could be a growth killer and that could be what is weighing down oil prices. India is one of the biggest emerging economies where a lot of global growth will come from," Michael Hewson, an analyst at CMC Markets, told Reuters.
Brent crude for June declined US$1.63 to $123.49 a barrel by 1730 GMT. US crude for June dropped US$1.22 to US$112.30.
Silver fell, heading for its biggest two-day drop since December 2008.
Spot silver declined 3.2 per cent to US$42.50 an ounce by 1736 GMT, after yesterday suffering its largest one-day drop in 29 months. US July silver futures shed almost 8 per cent to US$42.525.
Even so, the metal is still well above its 100- and 200-day averages.
"Silver has been, in the short term, overextended. Its divergence from its moving averages has been extreme," Robert Lutts, chief investment officer at Cabot Money Management, told Reuters.
Gold also slipped, with spot gold sliding 0.3 per cent to US$1,539.90 an ounce. US June gold futures fell 1.1 per cent to US$1,540.50.
In other news, Deutsche Bank was sued for more than US$1 billion by the US government, which claims it "repeatedly lied" so that thousands of risky mortgages qualified for a government insurance program.
According to the complaint, Deutsche Bank and its MortgageIT unit misled the government into believing their mortgages qualified for federal insurance, knowing they could make "substantial profits" when the loans were later sold.