Equities on both sides of the Atlantic declined as concern about Portugal's largest publicly traded bank renewed worry about the euro-zone's financial stability.
Shares of Portugal's Banco Espirito Santo plummeted 17 percent amid concern about missed debt payments by its parent Espírito Santo International before trading in the stock was halted. Bank shares in Italy and Spain also declined.
"People will shoot first and ask questions later when news like this hits," Lawrence Creatura, a fund manager at Federated Investors in Rochester, New York, told Bloomberg News. "It's a classic flight to safety across the equity, commodities and bond markets."
In Europe, the Stoxx 600 Index ended the session with a 1.1 percent drop from the previous close. The UK's FTSE 100 fell 0.7 percent, France's CAC 40 shed 1.3 percent, while Germany's DAX slumped 1.5 percent.
Benchmark stock indexes also declined in Portugal, Spain, Italy and Greece.
"The BES situation is a tangled story of cross holdings and unexplained debts which has highlighted the risks that still exist in some European banks," Lorne Baring, managing director of B Capital Wealth Management, told Reuters.
"There is some contagion effect in markets today," Barin added: "However, it may be an over-reaction to the BES news ... Some investors may be questioning the strength of the peripheral Europe recovery after a strong market performance."
In late afternoon trading in New York, the Dow Jones Industrial Average fell 0.27 percent, the Standard & Poor's 500 index slid 0.29 percent, while the Nasdaq Composite Index gave up 0.26 percent.
Declines in shares of Home Depot and Nike, down 2 percent and 1.3 percent respectively, led the Dow lower.
US Treasuries rose as some investors opted for the perceived safety of fixed-income securities, pushing the yield on the benchmark 10-year bond two basis points lower to 2.53 percent.
German bunds also advanced, sending Germany's 10-year yield three basis points lower to 1.20 percent.
"As I look at some of the policy prescriptions that the Federal Reserve relies on, looking at formulas that help guide you on when it's time to change, many of those are already pointing to lifting off of zero as early as even this year or next year," Kansas City Federal Reserve President Esther George said, according to Dow Jones.
Gold increased in appeal as well. Gold futures for August delivery rose 1.1 percent to settle at US$1,339.20 an ounce on the Comex.
"There seems to be a lot of angst in the market short-term but given the fact we had such a run the past couple of weeks, it seems to be more psychological than real," Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama, told Reuters.
The Chicago Board Options Exchange Volatility Index, also referred to as the investors' fear gauge, climbed 5 percent to 12.23.
Meanwhile, the latest US economic data provided more better-than-expected results on the nation's labour market, hot on the heels of last week's government jobs report for June. Initial claims for state unemployment benefits fell 11,000 to a seasonally adjusted 304,000 for the week ended July 5, according to the Labor Department.
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