The possibility of Western military action against the Syrian government hit equities worldwide on Tuesday, while boosting demand for safe-haven assets like the yen and gold.
Wall Street fell for a second day, with the S&P 500 and Nasdaq off more than 1 percent, and a rise in U.S. government debt prices suggested the flight to safety was gathering momentum.
The 10-year Treasury note rose 9/32 in price, its yield easing to 2.75 percent from 2.79 percent late on Monday.
"Concerns about the Syrian conflict have sparked a renewed flight to quality bid," said William O'Donnell, head Treasury strategist at RBS Securities in Stamford, Connecticut.
In the currency market, the safe-haven yen and Swiss franc gained and riskier currencies like the Australian and New Zealand dollars fell as geopolitical tensions rose.
The Swiss franc and the yen usually climb in times of financial market stress and geopolitical uncertainty, while growth-linked higher-yielding currencies are sold off.
Spot gold rose to its highest since early June at around $1,420 an ounce. Gold has rallied more than $200 since late June, when prices hit three-year lows.
Western sources who attended a meeting in Istanbul between envoys of an alliance opposed to Syrian President Bashar al-Assad and the Syrian National Coalition said "action to deter further use of chemical weapons by the Assad regime could come as early as in the next few days."
Adding to the rising tension, Defense Secretary Chuck Hagel said in a television interview with the BBC that the U.S. military is ready to act immediately should President Barack Obama order action against Syria.
"This will create a temporary dip (in the U.S. stock market), but the economic backdrop around the world is actually getting better," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.
"This will pass in a short number of days and the market will move higher before the end of the year," he said.
The Dow Jones industrial average was down 79.39 points, or 0.53 percent, at 14,867.07. The Standard & Poor's 500 Index was down 13.67 points, or 0.83 percent, at 1,643.11. The Nasdaq
Composite Index was down 37.38 points, or 1.02 percent, at 3,620.19.
Emerging market currencies such as the Turkish lira and the Indian rupee bore the brunt of the flight as doubts over the Syrian situation added to pressure from investors' positioning for an end to the supply of cheap dollars from the U.S. Federal Reserve's monetary stimulus.
The Indian rupee lost as much as 2.5 percent to reach a record low of 65.93 per dollar, while Turkey's lira weakened to 2.03 to the dollar, also a record low. Turkey's share index also slid.
Oil and shares
Brent crude oil for October climbed above $114 a barrel, nearly a six-month high, while U.S. crude was up $3 to $109 a barrel.
Russia's rouble, which normally benefits from stronger oil prices, hit a four-year low against the dollar-euro basket on concern over the situation in Syria.
As Syria's key ally and arms supplier, Russia has urged Washington not to use military force against President Bashar al-Assad's government. Traders said its response to any U.S. move against Syria would be key to whether the current shift into safer assets turned into a major flood.
In Europe, the FTSEurofirst 300 index of top European shares was down 1.5 percent at 1,205.09 after falling as low as 1,206.82, a level not seen since late July.
Asian markets fell 1.2 percent, while Tokyo's Nikkei ended 0.7 percent lower. That left the MSCI all-country world equity index down nearly 1 percent for a second day of falls, though it remains off its lows for the month.
More evidence that the recovery in Europe's largest economy, Germany, was gathering momentum in the latest monthly survey by the influential Ifo think-tank had little impact on market sentiment.
Germany's main DAX index was down 1.6 percent after the surprisingly strong data, with key French and Italian indexes both around 1.5 percent lower.
Italian shares had their second day of heavy selling after falling about 0.8 percent on Monday on concern over the stability of the ruling coalition, with Silvio Berlusconi's center-right party threatening to bring down the government.