The euro fell to a 3-week low against the dollar after comments from European Central Bank President Mario Draghi that the euro zone's economic outlook is subject to downside risks, leaving the door open for more policy action.
Draghi's comments came in a news conference after the ECB announced it was holding interest rates at record lows, as widely expected.
The Federal Reserve's minutes from its March meeting, released Tuesday, suggested the appetite for a third dose of quantitative easing, so-called QE3, has decreased.
The news further underscored the United States' divergence from a Europe facing recession, while the Spanish auction results suggested the effect of European funding operations was waning.
Equity markets have rallied steadily since the ECB's stimulus efforts eased funding pressures for euro-zone banks. Optimism about more stimulus from the Fed has also boosted stocks. The U.S. benchmark S&P 500 is up about 30 percent since early October.
"The major support for the economy and for the financial markets over the past two years has been stimulus, and without it, it's still a question whether these economies can make it on their own," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville.
The MSCI all-country world equity index .MIWD00000PUS slid 1.9 percent, while the three major U.S. stock indexes ended down sharply.
The FTSEurofirst 300 Index of top European shares .FTEU3 fell 2 percent to close at 1,050.99.
The Dow Jones industrial average .DJI fell 124.80 points, or 0.95 percent, to close at 13,074.75. The Standard & Poor's 500 Index .SPX was down 14.42 points, or 1.02 percent, at 1,398.96. The Nasdaq Composite Index .IXIC was down 45.48 points, or 1.46 percent, at 3,068.09.
It was a second day of losses on the Fed minutes for stocks, with most S&P 500 sectors declining. Energy, financial and technology stocks led the fall.
Stock investors mostly brushed aside data showing U.S. employers created 209,000 private-sector jobs in March, slightly above forecasts. A separate report showed the pace of growth in the U.S. economy's services sector slipped in March.
The private sector report provided some optimism about this week's government jobs report. U.S. stock exchanges will be closed on Friday for the Easter holiday when the U.S. monthly employment report, among the most widely watched economic indicators, is due to be released.
The euro last traded at $1.3142, down 0.7 percent on the day against the dollar. The session's trough of $1.3105 was its lowest since March 16.
Along with the ECB president's comments, the single currency was under pressure as Spain's borrowing costs jumped at its bond auction.
Spain sold 2.6 billion euros of government bonds, toward the lower end of its target range and at higher yields than at previous auctions. Its borrowing costs had been expected to rise, given growing concerns about its public finances.
A T-bill sale in Portugal met with better demand than the auction in Madrid, though the shorter-term nature of the debt meant its wider market impact was muted.
Following those auctions, yields on Spanish benchmark 10-year debt rose, and Spanish 5-year credit default swaps extended their early rise after the auction, up around 460 basis points.
On Tuesday, Spain, which recently announced fresh budget cuts as it slides back into recession, said its debt level is on course to reach a 22-year high.
COMMODITIES FALL, BONDS RISE
Commodities, a hedge against the inflationary and dollar-weakening effects of monetary stimulus, fell sharply.
Also weighing on Brent and U.S. crude oil futures was a U.S. government report showing crude inventories rose sharply in the United States last week.
Brent May crude fell $2.52, or 2.02 percent, to settle at $122.34 a barrel, while U.S. May crude fell $2.54, or 2.44 percent, to settle at $101.47 a barrel.
Spot gold was down 1.5 percent at $1,620.85 an ounce, having earlier touched a low of $1,611.80, its lowest since January 10.
U.S. bond prices rallied as losses in the stock market enhanced the bid for safe-haven U.S. government debt.
The benchmark 10-year U.S. Treasury note shot up 17/32 in price, with the yield at 2.2322 percent, compared with 2.31 percent on Tuesday.
"Yesterday there was a knee-jerk reaction to the minutes, and now we are seeing a bit of a correction to the over-reaction," said Jim Kochan, chief fixed income strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin, adding "equity markets are retreating and that provides a counter-bid to the Treasuries market."
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