NEW YORK World stocks pulled back from a one-month high on Tuesday, the euro tumbled and the yen hit a 15-year peak against the dollar on renewed concerns about European banks and the global economy.
Oil prices fell as the end of the U.S. holiday driving season added to the economic concerns. Gold prices rose as a result of investors seeking shelter from global economic concerns.
The yen also strengthened after comments by the Bank of Japan governor raised talk Japan was not preparing to stem the yen's strength.
U.S. Treasury prices rebounded after three sessions of losses as investors sought safety. Many also had second thoughts about the positive market impact of the U.S. payrolls report on Friday.
Souring investor sentiment was data showing German manufacturing orders unexpectedly fell in July at their steepest rate in more than a year.
Investors were also rattled by a Wall Street Journal report that said "stress tests" published more than a month ago underestimated some lenders' holdings of potentially risky government debt.
That helped rekindle concerns about the vulnerability of the sector after Germany's banking association said Monday the country's 10 biggest banks may need 105 billion euros of additional capital.
"There's concern about the health about the European banking sector ... that fear kind of comes and goes," said Tom Schrader, managing director, U.S. equity trading at Stifel Nicolaus Capital Markets in Baltimore.
The MSCI All-Country World equity index .MIWD00000PUS fell 1.03 percent, one day after closing at its highest level in nearly one month.
Major U.S. stock indexes tumbled more than 1 percent, with investors pocketing part of last week's strong gains. Wall Street returned from a long Labor Day holiday weekend.
The Dow Jones industrial average .DJI closed down 107.24 points, or 1.03 percent, at 10,340.69, while the Standard & Poor's 500 Index .SPX lost 12.67 points, or 1.15 percent, to 1,091.84. The Nasdaq Composite Index .IXIC fell 24.86 points, or 1.11 percent, to 2,208.89.
"It looks more like a consolidation than some type of conviction selloff," said Maier Tarlow, a New York Stock Exchange floor trader at Raven Securities. "We think that the market has got a bullish trend now, and unless we see repeated selloffs on better volume, we're going to keep that opinion."
The FTSEurofirst 300 index .FTEU3 of top European shares dropped 0.38 percent, with banking and mining shares losing ground and cutting off a two-week rally.
French bank Societe Generale (SOGN.PA), fell 3.85 percent.
Mining shares weakened after Australian Prime Minister Julia Gillard secured a second term in office, vowing to press ahead with a new mining tax and work toward a scheme that would force major polluters to pay for their carbon emissions.
The stocks of Xstrata XTA.L, BHP Billiton (BLT.L) and Rio Tinto .RIO.L ended down 1.4 to 1.8 percent
U.S. crude oil fell $0.51 to $74.09 per barrel.
EURO TUMBLES ON RISK AVERSION
Banking fears knocked down the euro, which weakened 1.5 percent against the dollar to $1.2679.
The yen's safe-haven status pushed it to a 15-year high against the U.S. dollar.
The dollar was down 0.48 percent against the yen, at 83.78. Against major currencies, however, the greenback was up 1.03 percent, according to the U.S. Dollar index .DXY.
Earlier in the trading day, the Bank of Japan Governor Masaaki Shirakawa said monetary authorities could not control forex rates, increasing speculation that Japan was not preparing to try to weaken the yen in the near term.
Shirakawa "has essentially ruled out intervention in the near term," CitiFXWire analysts said in a client note, adding that the statement helped to encourage yen bulls.
However, Japanese Finance Minister Yoshihiko Noda on Tuesday said the government would take firm action on currencies when needed, saying recent moves were clearly one-sided.
Ashraf Laidi, chief market strategist at CMC Markets in London said the Japanese currency is being bolstered by expectations that incumbent Prime Minister Naoto Kan will stave off a leadership challenge by rival Ichiro Ozawa.
U.S. Treasuries benefited from a flight to quality trade.
The benchmark 10-year U.S. Treasury note rose 1 point in price, with the yield at 2.598 percent. The 30-year bond was up 77/32, with the yield at 3.6624 percent.
Treasuries prices had been under pressure from stronger-than-expected U.S. economic data last week, including Friday's jobs numbers.
Spot gold rose 0.43 percent, to $1,254.90 an ounce.