US stocks and bonds have fallen as a war with Iraq grew more likely after US Secretary of State Colin Powell presented the case against Iraq to the United Nations.
World oil prices rose 1 per cent and the dollar, which had sunk to its lowest level in nearly four years against the euro, rose on views that Mr Powell's testimony would rally support around the US cause.
Stocks climbed during the address as investors hoped the evidence would convince other nations to support military action.
But the market took a tumble after Iraq's information minister said the allegations were "hollow" and envoys from such key countries as France, Russia, China and Germany remained sceptical on war and hoped inspections would continue.
The dollar pared gains, but remained firmer on the day.
The blue-chip Dow Jones industrial average erased a 1.6 per cent gain to fall 28.11 points, or 0.35 per cent, to 7,985.18. The broader Standard & Poor's 500 Index gave up 4.61 points, or 0.54 per cent, at 843.59. The technology-laced Nasdaq Composite Index, which had gained more than 2 per cent, closed down 4.67 points, or 0.36 per cent, at 1,301.48.
Adding to worries about geopolitical instability, North Korea said it had restarted the atomic facilities at the centre of its suspected nuclear weapons programme.
The dollar settled at $1.0782 per euro and 120.02 Japanese yen, up from $1.0879 per euro and 119.73 yen late Tuesday.
At the Commodity Exchange, February gold ended $2.60 lower at $376.40 an ounce on profit taking after rising to 6-1/2 year highs.
At the New York Mercantile Exchange, US light crude rose 35 cents to $33.93 a barrel, around $1.30 below two-year highs struck last month.
London's FTSE 100 closed up 88.6 points, or 2.5 per cent, at the day's peak of 3,678.7. In Tokyo, the Nikkei average rose 64.95 points or 0.77 per cent at 8,549.85.