A day after Secretary of State John Kerry said there was "undeniable" evidence of a large-scale chemical attack in Syria, tensions between the U.S. and the regime of Bashar Assad mounted. Defense Secretary Chuck Hegel said Tuesday the U.S. military was ready to strike if President Barrack Obama gave the order. Syria's foreign minister said his country would defend itself.
The threats raised worries on Wall Street that the U.S. was more and more likely to attack Syria. That could disrupt energy trade in the region, which in turn could hurt other markets as well as the economy.
The Dow Jones industrial average fell 138 points, or 1 percent, to 14,807 in afternoon trading, the biggest decline in two weeks. The drop extended losses from Monday afternoon, when Kerry denounced Syria and caused the market to sag in the final hour of trading.
The Standard & Poor's 500 index lost 20 points, or 1.2 percent, to 1,637 and the Nasdaq composite fell 63 points, or 1.7 percent, to 3,594.
"The law of unintended consequences and the history of previous military interventions in the region is not a recipe for political and economic stability," said Neil MacKinnon, global macro strategist at VTB Capital.
The impact wasn't just in stocks. Gold prices advanced and government bond prices jumped because traders see those investments holding their value better in times of uncertainty. Oil surged $3.09, or 3 percent, to $109, a level last reached in May 2011.
While Syria itself has little oil, traders feared an intervention in Syria could cause further instability in the Middle East and possibly disrupt the flow of oil from the region.
"People worry about this becoming a worst-case scenario and turning into a regional conflict," said Bill Stone, chief investment strategist at PNC Asset Management.
Energy prices dragged down the airline sector on concerns that higher oil prices could lead to higher fuel costs. United Continental Holdings, the world's largest airline by revenue, dropped $2.11, or 7.1 percent, to $27.75 and Delta Air Lines lost $1.25, or 6.1 percent, to $19.02.
Stone said oil prices could start weighing on consumer spending down the road, but it is still too early to gauge the longer-term impact.
Concerns over a U.S.-Syria conflict spilled over into global markets.
In Europe, the Britain's FTSE 100 index fell 0.8 percent at 6,440 while Germany's DAX fell 2.3 percent to 8,242. The CAC 40 in France was 2.4 percent lower at 3,968.
In corporate news, discount shoe seller DSW jumped $6.33, or 7.8 percent, to $87.65 after the company reported an adjusted profit of 97 cents per share, easily beating analysts' estimate of 80 cents per share, according to FactSet.
J.C. Penney rose 20 cents, or 1.5 percent, to $13.55 after the company's biggest investor, Bill Ackman, said he plans to sell his entire stake in the discount department store chain.
Wall Street is also digesting two economic reports, one on U.S. consumer sentiment, the other on home prices. The Conference Board said its consumer confidence index rose to 81.5 in August, up from 80.3 the month before. Economists had expected 79, according to FactSet.
The Standard & Poor's/Case-Shiller 20-city home price index rose 12.1 percent in June from a year earlier, nearly matching a seven-year high. But month-over-month price gains slowed in most markets, a sign that higher mortgage rates may be weighing on the housing recovery.
AP Business Writer Pan Pylas contributed from London.
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