Equity screens were also awash with red in Asia as investors fled to safe haven assets after US President Donald Trump doubled down on his North Korea rhetoric.
While the German DAX Index closed just below the unchanged line, the U.K.'s FTSE 100 Index and the French CAC 40 Index both tumbled by 1.1 percent. The Stoxx Europe 600 benchmark was down 1.1% (http://www.marketwatch.com/story/european-stocks-face-worst-week-in-9-months-on-us-north-korea-tensions-2017-08-11), while Hong Kong's Hang Seng led the Asian losses with a drop of 2%.
North Korea said it was completing plans to fire four intermediate-range missiles over Japan to land near the US Pacific island territory of Guam in an unusually detailed threat that further heightened tensions with the United States.
"The uncertainty surrounding the situation has been the main driver of the markets recently".
Many world stock markets have hit record or multiyear highs in recent weeks, leaving them vulnerable to a sell-off, and the tensions over North Korea proved to be the trigger.
The dollar index, which measures against a basket of currencies, fell 0.05 per cent. "The market is interpreting it as lowering the odds of the Fed raising rates in December", said Keith Lerner, chief market strategist at SunTrust Advisory Services in Atlanta.
The pan-European Stoxx 600 ended over 1% lower to a five-month low with nearly all sectors in negative territory.
The last time the S&P closed down more than 1 percent was May 17 when it fell 1.8 percent. The index bounced off its lowest closing level in six months.
News that USA producer prices unexpectedly fell in July earlier helped send the dollar lower.
The market also awaited U.S. consumer inflation data on Friday that would offer more clues about the pace of the U.S. Federal Reserve's monetary tightening.
Economic data showed United States producer prices unexpectedly fell in July, recording their biggest drop in almost a year, while separate figures showed the number of Americans filing for unemployment benefits unexpectedly rose last week.
"Given the great run we've had, seems like some sort of pullback wouldn't be surprising", said Michael Baele, managing director of investments at U.S. Bank Private Wealth Management. Gold has rallied 2.6% this week, while the 10-year Treasury yield touched a six-week low of 2.1%. Spot gold inched down 0.1 percent to $1,284.64 per ounce as of 0616 GMT, but was set for a weekly gain of over 2 percent.
Ongoing global glut concerns lingered in oil markets despite a bigger-than-expected draw in USA crude inventories, leaving prices volatile.
The September crude contract was up 20 cents to US$49.76 per barrel and the September natural gas contract was up seven cents to US$2.95 per mmBTU.