"Obviously we are looking at the increased tensions between the USA and North Korea", said Brad Bechtel, managing director FX at Jefferies in NY. "Comments that can lead us to a war".
The sell-off is likely to extend into the European session, with financial spread-better CMC Markets expecting Germany's DAX and France's CAC 40 to open down about 0.7% each and Britain's FTSE 100 to start 0.55% lower.
Japanese markets were closed for a holiday but the tense mood dragged Asian shares lower and an MSCI index of stocks across the globe was on track to post its largest weekly drop since the week before Donald Trump won the US presidential election in November.
U.S. stock futures slipped while U.S. Treasuries, gold and the safe-haven yen rose in early Asian trading on Wednesday after tensions on the Korean peninsula escalated with Pyongyang's warning that it is "carefully examining" plans for a missile strike on the U.S. Pacific territory of Guam.
"We would now be careful with a whiff of risk aversion in the air and, by extension, also stay away from shorts in the rates market", RBC's global macro strategist Peter Schaffrik said.
"It's just a classic risk-off day", said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in NY.
USA missile makers Raytheon and Lockheed Martin have outperformed Wall Street by nearly 4 percent in recent days.
Although Japan could be in the front line of any clash with North Korea, the yen is benefitting because Japan is the world's biggest creditor nation and Japanese investors tend to repatriate funds in times of stress, attracting other flows.
The rhetoric between the US and North Korea has continued to heat up, leading traders to look to safe havens such as gold and treasuries. A gauge of volatility on the S&P 500, the VIX hit its highest reading for over a month.
Computer hardware stocks rebounded following recent weakness, with the NYSE Arca Computer Hardware Index climbing by 1.4 percent.
Australian shares fell to near three-week lows in a broad-based selloff.
The CBOE Volatility index, the most widely followed barometer of expected near-term USA stock market volatility, rose the most in about 12 weeks.
In currencies, the yen strengthened 0.64 percent versus the greenback at 109.37 per dollar.
The dollar index, which measures against a basket of currencies, fell 0.05 percent.
European stocks have fallen for a third day on Friday and look headed for their worst week since early November previous year, as US President Donald Trump's rhetoric on North Korea over the past few days made investors risk averse.
Spot gold (XAU=) added 0.1 percent to $1,261.71 an ounce, pulling away from the previous session's two-week lows.
Markets are now awaiting United States consumer price data for July, due later in the session.
Crude futures extended losses on fears of slowing demand and lingering concerns over a global oversupply meanwhile.
The price of crude oil dropped more than two percent Thursday, the cost of a barrel falling to $48.49.