Investors also kept an eye on tensions in Bahrain, as well as on euro-zone borrowing costs, especially in Portugal.

On Wall Street, major US stock indexes slumped more than 1 percent and volatility spiked higher after European Union Energy Commissioner Guenther Oettinger told the European Parliament: "In the coming hours, there could be further catastrophic events, which could pose a threat to the lives of people on the island."

The EU energy chief's spokeswoman later said he had no privileged information on Japan's nuclear reactor situation and that his comments were based on media reports. But reaction to his comments, including the yen's surge to a 16-year high, underscored the fragile state of equity markets.

"We are so fixated here on Japan, and this intraday volatility is without question here to stay as we are all quickly learning what nuclear power is. You can throw everything else out the window," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio.

US stocks opened lower as the price of Brent crude oil rose to an intraday high above $111 a barrel.

Oil rose 2 percent on Wednesday. Brent for April traded up $2.38 to $110.90 a barrel by 12:52 p.m. EDT (1652 GMT), rebounding from its sharpest tumble in 13 months on Tuesday to a near three-week low of $107.35. US crude rose $1.12 to $98.30 a barrel.

Euro-zone debt worries also pressured the euro. Portugal's 12-month borrowing costs rose at a bill auction after a two-notch rating downgrade by Moody's, showing the debt-laden country remains under pressure despite a euro-zone deal to tackle the debt crisis.

"There is a perfect storm of uncertainty right now in terms of global growth, and markets are taking that into account," said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, New York.

Some sectors of financial markets began to readjust after a worldwide battering of riskier assets following the earthquake, tsunami and nuclear disasters that have hit Japan, the world's third-largest economy. But the reports of ongoing troubles at a Japanese nuclear plant deepened investor fears.

MSCI's all-country world stock index was down 0.37 percent. Over the past three sessions, the index fell as much as 4.5 percent, following a near 20 percent, two-session dive in Japan's Nikkei average.

A 5.7 percent rise in the Nikkei drove the recovery in Asia, though it remained down more than 11 percent for the year.

There was widespread belief that the post-earthquake sell-off had gone too far, too quickly, but there was still concern that the nuclear reactor crisis was unresolved. The main index of volatility rose 15 percent to its highest level since August.

The Dow Jones Industrial Average dropped 149.44 points, or 1.26 percent, to 11,705.98. The Standard & Poor's 500 Index lost 14.72 points, or 1.15 percent, to 1,267.15 and the Nasdaq Composite Index fell 27.17 points, or 1.02 percent, to 2,640.16.

Europe's Eurofirst 300 dropped 1.4 percent. Banks led decliners after the Moody's downgrade of Portuguese debt.

US and European markets also weakened after the US government said its producer price index surged at its fastest pace in more than 1-1/2 years in February.

Benchmark US 10-year Treasury yields declined 0.07 percentage point to 3.22 percent. The yield earlier hit a more than three-month low of 3.14 percent.

The 10-year US Treasury note's price shot up 23/32.

The yen pushed to a 16-year high versus the dollar as investors speculated Japan insurers would repatriate the currency to pay for claims. The dollar-yen rate was last down 0.8 percent at 80.10 after busting through the November low to 79.972 yen, according to trading platform EBS.

Japan's nuclear crisis was also seen as triggering more safe-haven yen demand, raising the prospect of intervention to stem big gains.

"We wouldn't talk about a recovery in dollar/yen yet," said Lutz Karpowitz, FX strategist at Commerzbank in Frankfurt. A drop under 80 yen is not expected, however, as authorities are likely to take steps to prevent a steeper yen rise before the level was broken, he said.

The dollar index against major currencies rose 0.4 percent, while the euro slipped 0.48 percent to $1.3929, having failed to break above a four-month high of $1.4036 hit earlier this month.

Spot gold prices rose $5.20, or 0.37 percent, to $1399.10.