Equities slid, while US Treasuries and gold climbed, as US President Donald Trump's latest comments further inflamed tension with North Korea.
If the North Korean regime "does anything" to the US or a US ally "things will happen to them like they never thought possible," Trump told reporters on Thursday, according to Bloomberg.
Wall Street's fear gauge-the CBOE Volatility Index jumped 36 per cent to 15.06.
"The markets in general are very on edge and they're very leery about risk," Mariann Montagne, a portfolio manager at Gradient Investments, told Bloomberg. "When earnings are not beating expectations there's a sell off in the companies, and we're just not seeing that money reinvested because of the geopolitical risks."
In 3.23pm trading in New York, the Dow Jones Industrial Average gave up 0.7 per cent, while the Nasdaq Composite Index dropped 1.8 per cent. In 3.08pm trading, the Standard & Poor's 500 Index fell 1 per cent.
Even so, Wall Street remains near record highs.
"We're due for a little correction here. When you're due, there's always going to be something that happens in the world that's going to make people nervous," Matthew Peterson, chief wealth strategist for LPL Financial in Charlotte, North Carolina, told Reuters.
"It gives them almost a mental excuse to sell. What's happened in North Korea is enough to do that."
"Although we certainly can get a 5 to 7 per cent correction, we don't think it's the start of a significant bear market," Peterson noted.
Investors opted for the perceived safety of US Treasuries, which pushed the yield on the 10-year note three basis points lower to 2.21 per cent.
The Dow slid as declines in shares of Apple and those of Goldman Sachs, recently down 2.3 per cent and 1.7 per cent respectively, outweighed gains in shares of McDonald's and those of Coca-Cola, recently up 1.4 per cent and 0.5 per cent respectively.
The latest US economic data cemented expectations that inflation will remain subdued amid a robust labour market.
A Labour Department report showed its producer price index posted a surprise drop in July, down 0.1 percent for the largest slide in almost a year. A separate Labour Department report showed initial claims for state unemployment benefits rose 3,000 to a seasonally adjusted 244,000 for the week ended August 5.
"Another twist of the screw tighter for this labour market but inflation is not able to gain a foothold in this economy," Chris Rupkey, chief economist at MUFG in New York, told Reuters.
"The pot is on the stove boiling but no inflation steam is coming out."
In Europe, the Stoxx 600 Index finished the day with a decline of 1 per cent from the previous close. Germany's DAX Index fell 0.6 per cent, while the UK's FTSE 100 Index retreated 1.2 per cent, and France's CAC 40 Index slid 1.4 per cent.