Europe's other main indices were also in negative territory, with the Frankfurt Dax and Paris CAC 40 down by similar amounts, declining by 1.5% and 1.8% respectively.
MSCI's broadest index of Asia-Pacific shares outside Japan skidded 1.55 percent, its biggest one-day loss since mid-December. Both the Nasdaq and the Russell are set for their third straight weekly decline.
Many markets had already been at record or multi-year highs after an extended rally, leaving them vulnerable to a sell-off. North Korea claims it is in the final stages of preparing a plan to launch four intermediate-range ballistic missiles over Japan and into waters just off the island of Guam, where about 7,000 US troops are based.
"While the two nations are at loggerheads, it is going to be hard to imagine money flowing into stocks", said David Madden, market analyst at CMC Markets UK.
Many Asian currencies struggled, with the Korean won heading for its sharpest fall in almost eight weeks. The Shanghai Composite slipped 1.1 percent to 3,240.69.
Stocks are lower at midday as investors weighed the growing tensions between the USA and North Korea.
Trump had "let out a load of nonsense about "fire and fury" failing to grasp the ongoing grave situation". The most logical places to put the cash are the Japanese Yen, U.S. Treasurys and gold. Small-company stocks fell more than the rest of the market. The index closed at its highest level since November 8, when Trump was elected president.
S&P 500 e-minis were down 10.25 points, or 0.41 percent, with 180,193 contracts traded.More news: Russian Federation on 'high alert' over escalating US-North Korea rhetoric
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The dollar widened losses against the yen to hit a two-month low.
The yen tends to benefit during times of geopolitical or financial stress as Japan is the world's biggest creditor nation and there is an assumption that Japanese investors there will repatriate funds should a crisis materialize.
The possibility of escalation is made even more acute by the lack of any means of official communication across the Demilitarized Zone, though there has been no easing of the barrage of inflammatory comments in the USA and the North since new sanctions against North Korea were announced last week.
For now, the dollar remained on the back foot, pulling back 0.1 percent to 0.9635 Swiss francs on Friday, after dropping as much as 1.2 percent to a two-week low overnight.
"This inflation data for the month was not good".
The yield on the 10-year Treasury note fell to 2.22 percent from 2.26 percent late Tuesday.
Additionally, US-focused events tend to have a bigger impact. The VIX reached a session high of 12.63 before paring gains to settle up 1.4% at 11.11.
The Energy Information Agency reported that oil inventories dropped by 6.5 million barrels in the week to last Friday, against the 2.7 million decline that had been expected. They plunged 2 percent on Thursday on fears of slowing demand and lingering concerns over a global oversupply.