The VIX rose further on Wednesday, as far as 12.63, its highest in more than a month.
SIMMERING TENSIONS: North Korea revealed on Thursday a detailed plan to launch a salvo of ballistic missiles toward the U.S. Pacific territory of Guam, a major military hub and home to U.S. bombers.
US Defence Secretary Jim Mattis told Pyongyang it should stop any actions that would lead to the "end of its regime and the destruction of its people".
"What has changed this time is that the scary threats and war of words between the USA and North Korea have intensified to the point that markets can't ignore it", said Shane Oliver, head of investment strategy at AMP Capital in Sydney.
However, market watchers said equity markets remained focused on the deepening geopolitical crisis, as angry threats from Washington and Pyongyang stoke fears of a catastrophic miscalculation with global consequences.
The Dow Jones Industrial Average .DJI fell 204.69 points, or 0.93 percent, to close at 21,844.01, the S&P 500 .SPX lost 35.81 points, or 1.45 percent, to 2,438.21 and the Nasdaq Composite .IXIC dropped 135.46 points, or 2.13 percent, to 6,216.87.
Emerging market stocks lost 1.03 percent. The Russell 2000 index of smaller-company stocks gave up 6 points, or 0.5 percent, to 1,390.
Traditional safe-haven currencies including the Swiss franc and Japanese yen rose against the USA dollar. U.S. President Donald Trump said on Thursday afternoon that his earlier warnings to North Korea may not have been tough enough.
"Tensions are still high and not going away at the moment".
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Worries about increased US-North Korea tension also weighed on the Canadian dollar, which weakened against its US counterpart, despite higher oil prices and stronger-than-expected domestic housing data.
The dollar index, which tracks the greenback against six rival currencies, was up 0.07 percent to 93.717, after rising as high as 93.888 earlier in the session.
United States producer prices Thursday disappointed, as traders await consumer price inflation figures later Friday.
The Japanese yen strengthened 0.08 per cent versus the greenback at 110.00 per dollar.
Japan is the world's biggest creditor nation and there is an assumption Japanese investors may repatriate their foreign holdings in times of heightened global uncertainty. Sterling was last trading at US$1.3006, up 0.02 per cent on the day. 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 percent.
Flight to safety has helped lift the Japanese yen and gold prices, after North Korean leader Kim Jong Un made an explicit threat on Wednesday to strike a US military base in Guam.
Oil prices rose after a report showed United States refineries processed record amounts of crude in the latest week, eating into inventories.
Elsewhere in commodities, the September crude contract advanced 20 cents to US$49.76 per barrel and the September natural gas contract was up seven cents to US$2.95 per mmBTU.
Gold was up USD8 at USD1287 an ounce, helped by its safe haven appeal to its highest in two months. The strength in the sector comes as gold for December delivery is jumping $11.30 to $1,290.60 an ounce.