North Korea responded with threats to launch missiles into the Pacific Ocean near Guam, a USA territory.
The Fed expects "very weak" USA inflation to rebound thanks to a slide in the dollar and to a labour market that keeps getting hotter, one of the Fed's most influential officials said in comments that reinforce its gradual policy-tightening plan.
President Donald Trump ratcheted up his rhetoric toward North Korea and its leader on Thursday, warning Pyongyang against attacking Guam or U.S. allies after it disclosed plans to fire missiles over Japan to land near the U.S. Pacific territory. The Dow is down 123.95 points or 0.6% at 21,924.75, the Nasdaq is down 95.89 points or 1.5% at 6,256.44 and the S&P 500 is down 23.40 points or 1% at 2,450.62.
The focus on North Korea has largely overshadowed a Labor Department report showing an unexpected drop in United States producer prices in the month of July.
The back-and-forth came on the heels of reports the USA intelligence community has determined North Korea has successfully produced a miniaturized nuclear warhead that can fit inside its missiles.
Overall, the healthcare sector slumped 3.4 percent.
Disney dropped 3.9 percent after reporting a weak quarter and saying it would pull its movies from Netflix and start its own video streaming services. Economists had expected productivity to increase by 0.7%.
Cempra (CEMP) is leading the biotech sector lower, extending the pullback seen over the course of the previous session. The index has fallen to its lowest intraday level in well over a month.
J&K: Encounter underway in Shopian; 2-3 terrorists holed up
Two soldiers have been killed and three injured in the on-going gunfight in South Kashmir's Shopian district. Meanwhile, clashes between security forces and locals have also errupted near the encounter site.
In commodities trading, U.S. crude oil was wallowing around $49 to the barrel amid speculation that a predicted gain in American output will offset OPEC-led efforts to trim a global glut.
Meanwhile, gold stocks are bucking the downtrend, driving the NYSE Arca Gold Bugs Index up by 1.2%. The index has slid to its lowest intraday level in nearly eight months.
Investors are losing enthusiasm for Canada's banking stocks as a slowdown in the country's housing market dents banks' growth prospects, with insurance companies seen as a better bet to benefit from higher interest rates.
U.S. stocks ended lower on Thursday, and Asian markets fell sharply, with Hong Kong's Hang Seng index dropping 2%.
Shares of gold miners Polymetal International PLC (POLY.LN) and Fresnillo PLC (FRES.LN) were among the relatively few advancers, tracking gains of roughly 1% for gold prices to $1,273.70 an ounce.
The major European markets also showed notable moves to the downside on the day.
The pan-European STOXX 600 was down 0.7% at closing, France's CAC 40 fell 1.4% after a vehicle hit a group of soldiers in Paris in what is thought to have been a deliberate act, and a fall in bond yields saw Germany's DAX down 1.1%.
Geopolitical risks can boost demand for safe haven assets such as gold. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, is down by 1.5 basis points at 2.226%.