A batch of disappointing earnings results from big retail chains and simmering tensions between the USA and North Korea weighed on the market.
The Standard & Poor's 500 index fell 35 points, or 1.4 percent, to 2,438, its biggest drop since mid-May. The Nasdaq lost 135 points, or 2.1 percent, to 6,216.
The S&P 500, which had its biggest one-day drop in nearly three months on Thursday, was on track to post its biggest weekly decline since November. The Russell 2000 index of smaller-company stocks gave up 19 points, or 1.4 percent, to 1,377. All the indexes are down for the week.
Benchmark 10-year notes last rose 7/32 in price to yield 2.1888 percent, from 2.211 percent late on Thursday. Financial companies and department store operators were among the big decliners.
Tensions between North Korea and the US have intensified in recent days after Trump warned of severe retribution should the authoritarian state proceed with any more missile tests or threats. "As long as it doesn't go beyond just a war of words, this is going to be short-lived".
Trump's comments followed reports that North Korea had successfully produced a nuclear warhead that could be fitted inside its missiles.
The market jitters gave investors an opportunity to pocket some of their recent gains after a string of record highs fueled by strong corporate earnings. "That reset is being triggered by North Korea geopolitical concern and stretched valuations", said Peter Kenny, senior market strategist at Global Markets Advisory Group, New York.
He said the crisis provided a "perfect trigger" for a correction at a time when many markets - including the FTSE 100 - were at or around record highs, leaving them vulnerable to a sell-off if investors think it is time to take profits.
But the increasingly bellicose atmosphere, driven by unpredictable leaders on both sides, has seen anxiety escalate.
TECH SLIDE: Losses among technology stocks led the market slide. Advanced Micro Devices gave up 50 cents, or 3.9 percent, to $12.33.
Meanwhile, markets in Japan, South Korea and other Asian countries were also lower, and so-called futures signaled that USA markets would also open down.
Safe havens benefited from the move away from stocks - gold rising again to around $1,290 an ounce after surging 1.3 percent Wednesday - but other risky assets such as oil and copper held their price.
USA crude rose 0.43 percent to $48.80 per barrel and Brent was last at $52.01, up 0.21 percent on the day.