The blue-chip Dow fell 141 points, or 1.3%, to close at 11,037 with energy and materials stocks taking the brunt of the selling, given their sensitivity to Asian emerging-market growth. Alcoa (AA), Exxon Mobile (XOM) and Chevron (CVX) were among the Dow's worst performing shares.
The broader S&P 500 ($INX) lost 17 points, or 1.4%, to finish at 1,181. All 10 sectors of the S&P declined, led by energy and basic materials. The tech-heavy Nasdaq Composite ($COMPX) tumbled 37 points, or 1.5%, to 2,495.
Also weighing on equities was a more pessimistic view on the recovery from the Federal Reserve. Fed officials cut their outlook for economic growth through this year and next, minutes from the last policy meeting revealed. The central bank sees 2010 economic growth coming in at 2.4% to 2.5%, down from a prior forecast of 3% to 3.5%. GDP in 2011 is now seen increasing 3% to 3.6%, down from a prior outlook of 3.5% to 4.2%
"This Was No Missile Test"
European debt fears also weighed on Tuesday's trading, but the main force behind the sell-off was the deadly clash in Korea. North Korea fired more than 100 artillery shells onto a South Korean border island, killing two marines and wounding 18 others in an attack that prompted the South to return fire and put its military on its highest alert.
"Lingering concerns over the Irish debt issue. . .and heightened military tensions between the two Koreas (this was no missile test -- bullets were fired for the first time since the war nearly six decades ago) are undercutting the risk-on trade," David Rosenberg, chief economist and strategist at Gluskin Sheff, told clients in a note.
Gold futures finished up $18, or 1.3%, to $1,375 an ounce on the Comex division of the New York Mercantile Exchange (CME). Benchmark crude oil futures declined 26 cents, or 0.3%, to $81.46 a barrel on the Comex. Treasurys also benefited from the flight to safety, as the yield on the benchmark 10-year Treasury hit 2.76%, a level not seen for more than a week. (Bond yields and prices move in opposite directions.)
Heightened geopolitical risks eclipsed some encouraging economic news at home. The U.S. economy grew at a slightly faster pace in the third quarter than previously estimated, helped by improvements in consumer spending and overseas sales of U.S. goods. Third-quarter GDP was revised upward to a 2.5% annual rate from an initial reading last month of 2%.