Global markets were rattled Wednesday as blasts in Iran that killed at least 103 fanned fears of the war between Israel and Hamas spreading further.
Oil prices spiked more than 3 percent after twin bomb blasts ripped through a crowd commemorating Revolutionary Guards general Qasem Soleimani, four years after his death in a US strike, in what Iranian authorities labelled a "terrorist attack".
The closure of a Libyan oil field also heightened supply concerns.
"Heightened tensions in the Middle East following a bomb blast at a ceremony honouring a slain general in Iran have led to further risk-off sentiment and rising US yields," said Axel Rudolph, senior market analyst at online trading platform IG.
Higher US bond yields helped push down equities, which were already under pressure as investors worried that the stocks rally in the final months of 2023 on hopes of interest rate cuts in 2024, may have gone too far.
The dollar rose against the euro and yen as dealers awaited fresh clues on the Fed's interest-rate outlook in the upcoming minutes from its final monetary policy meeting of 2023.
"Messaging from the central bank seemed a touch confused at the end of 2023 as it initially implied rate cuts in 2024 before such talk was dampened," noted AJ Bell investment director Russ Mould.
The "minutes may provide some clarity", he added.
Equities surged late last year on expectations the US central bank would slash interest rates in 2024 as inflation cools.
However, analysts have warned that investors should prepare for a pullback, with tech titans such as Apple and Amazon likely to take a hit.
"The market may have gotten ahead of itself about (rate) cuts," said City Index analyst Fiona Cincotta.
The Fed's post-meeting statement in December had indicated three interest rate cuts this year, though some market participants are tipping far more.
Briefing.com analyst Patrick O'Hare said the market welcomed Fed Chairman Jerome Powell's indication there was some talk at the meeting about when it might be appropriate to begin reducing interest rates.
"Market participants will want to see today just how involved that conversation was," he said.
"If it doesn't sound as lively as the market thought it was at the time, then market rates are at risk of backing up and serving as a catalyst for stocks rolling over," he added.
Vishnu Varathan at Mizuho Bank said the year "has kicked off with risk retrenchment", said
"Whether this is a durable purge from excessive exuberance or merely profit-taking is unclear."
David Morrison at Trade Nation said the US indices look particularly overbought as Europe's major indices began consolidating in mid-December.
"The upcoming fourth quarter earnings season may be the perfect excuse to take profits and it’s possible that we get something deeper now, as there have been no serious corrections in the whole of this bull run," he said.
Data released Wednesday didn't help sentiment, with US jobs openings declining in November and manufacturing sector contracting for a 14th consecutive month in December.
Friday sees the release of the closely watched US non-farm payrolls data.
- Key figures around 1630 GMT -
West Texas Intermediate: UP 3.1 percent at $72.57 per barrel
Brent North Sea Crude: UP 2.9 percent at $78.10 per barrel
New York - Dow: DOWN 0.6 percent at 37,484.27 points
New York - S&P 500: DOWN 0.6 percent at 4,715.23
New York - Nasdaq: DOWN 0.8 percent at 14,649.92
London - FTSE 100: DOWN 0.5 percent at 7,682.33 (close)
Paris - CAC 40: DOWN 1.6 percent at 7,411.86 (close)
Frankfurt - DAX: DOWN 1.4 percent at 16,538.39 (close)
EURO STOXX 50: DOWN 1.4 percent at 4,448.13 (close)
Hong Kong - Hang Seng Index: DOWN 0.9 percent at 16,646.41 (close)
Shanghai - Composite: UP 0.2 percent at 2,967.25 (close)
Tokyo - Nikkei 225: Closed for a holiday
Euro/dollar: DOWN at $1.0914 from $1.0942 on Tuesday
Dollar/yen: UP at 143.43 yen from 141.99 yen
Pound/dollar: UP at $1.2645 from $1.2617
Euro/pound: DOWN at 86.30 pence from 86.72 pence