News late Tuesday that North Korea was reviewing plans for an attack on US military assets on the island of Guam came just hours after President Trump had warned that continued threats would be met "with fire and fury like the world has never seen".
Japan's Nikkei had been down more than 1% overnight Tuesday and South Korean shares had also slipped. Still, he said, "the Washington, D.C., bedlam and North Korea's saber-rattling is muddying the broader landscape".
The CBOE Volatility Index, better known as the VIX and the most widely followed barometer of expected near-term stock market volatility, rose the most in about 12 weeks.The index ended up 4.93 points at 16.04, the highest level since November 8, when Trump was elected president. Lockheed Martin, Raytheon, General Dynamics and Northrop Grumman were all up, with the Dow Jones U.S. defense index up 1.48 percent at 409.58.
In 3.23pm trading in NY, the Dow Jones Industrial Average gave up 0.7 percent, while the Nasdaq Composite Index dropped 1.8 percent.
Eight of the 11 major S&P sectors were lower, with the consumer discretionary index's 0.59 percent fall leading the decliners.
Energy stocks also fell along with the price of crude oil. The Russell 2000 index of smaller-company stocks gave up 4.02 points, or 0.3%, to 1,410.15.
"Trump's comments about North Korea have created nervousness and the fear is if the president really means what he said "fire and fury".
The FTSE 100 dropped 44 points, or 0.6%, to 7,498 while the German DAX 30 lost 0.7% and the French CAC 40 fell 0.8%.
Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management, said: "While the tough talk about the potential for war (between the United States and North Korea) is scary, investors have heard it many times before".
The heavyweight financials sector, which accounts for more than a third of the index's weight, was down 0.25 percent as US and Canadian bond yields fell. Investors' uncertainty, measured by the VIX volatility index, is still at higher levels not seen since the election, but stock markets are back to positive returns. The Dow slid 0.2 percent to 22,085.34. "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".
Nevsun Resources Ltd offset some of the material group's gains, plunging 18.4 percent to C$2.685 after the company reported disappointing quarterly results.
Benchmark U.S. crude rose 23 cents to settle at $48.82 a barrel on the on the New York Mercantile Exchange. The euro slid to 1.1752 dollars from 1.1793. Brent crude, the worldwide standard, lost 23 cents to 52.14 dollars a barrel in London.