US stocks dive amid Korea tensions

A bleak forecast by the Federal Reserve that the US economy will grow at a much slower pace than previously expected next year further jolted trade.

The blue-chip Dow Jones Industrial Average slipped 142.21 points (1.27 per cent) to close at 11,036.37. The S&P 500 index, a broader measure of the market, lost 17.11 points (1.43 per cent) to 1,180.73.

The tech-rich Nasdaq was down 37.07 points (1.46 per cent) to 2,494.95.

The declines on Wall Street followed the steps of stock markets in Europe and Asia.

Stocks slumped all across the board, with the energy and industrial sectors suffering notably.

Shares in Chevron and Exxon Mobil shed 1.7 per cent and 1.2 per cent respectively, while stocks of heavy equipment maker Caterpillar and General Electric both lost 1.7 per cent.

Among the few gainers was the world's largest computer maker Hewlett-Packard, which saw its shares rise 2.2 per cent after reporting stronger than expected earnings late on Monday.

"Sentiment continues to be unnerved by lingering euro-zone debt concerns, while reports of a skirmish between North and South Korea are exacerbating sentiment on Wall Street," analysts at Charles Schwab said.

In one of the most serious border incidents since the 1950s, North Korea fired dozens of shells onto or around a South Korean island near the disputed Yellow Sea border, killing two marines and setting homes ablaze.

Meanwhile concerns over the eurozone economy continued to weigh on trade, as Ireland faced more political turmoil after Prime Minister Brian Cowen called for early elections after agreeing on an international bailout plan.

Traders fear that after Ireland, other small European economies will require international assistance to avoid bankruptcy.

And minutes from the Fed's last November meeting, where members decided to renew massive asset purchasing in a bid to boost the economy, showed that growth would be around half a percentage point less than expected this year and in 2011.

Forecasts put forth at the meeting showed that already anemic growth predictions have been slashed to 2.4-2.5 per cent this year and 3.0-3.6 per cent in the next.

And unemployment was not expected to go below 9.5 per cent this year and 8.9 per cent in 2011, according to the minutes.

The bleak forecast followed data showing the US economy grew by 2.5 per cent in the third quarter, at a much faster rate than first thought.

The Commerce Department had previously reported that gross domestic product rose 2.0 per cent in the quarter.

The bond market rose.

The yield on the 10-year Treasury bond fell to 2.76 per cent from 2.81 per cent on Monday, while that of the 30-year bond slipped to 4.17 per cent from 4.21 per cent. Bond prices and yields move in opposite directions.