South Korea warned of retaliation if North Korea took more aggressive steps after Pyongyang fired artillery shells at a South Korean island, in one of the heaviest attacks in the area since the Korean War ended in Y 1953. The iShares MSCI South Korea Index Fund fell 5.4%.

The unexpected flare-up increased investor anxiety. The CBOE Volatility Index .VIX, Wall Street’s fear gauge, rose 12.3%, its largest daily percentage gain in more than 3 months.

Ireland’s unsteady situation hurt the Euro, which also had contributed to the slump in stocks. The equity market’s tight link to the Euro has broken of late but resurfaces in times of turmoil. Investors remain concerned about a widening debt crisis on the continent.

The European Union urged Ireland to adopt an austerity budget on time to unlock promised EU/IMF funding, while Irish Prime Minister Brian Cowen rebuffed calls for a snap election and insisted the budget would go ahead as planned on December 7. An index of US-traded shares of Irish companies .BKIE fell 4.9%.

The DJIA .DJI fell 142.21 pts, 1.27 pt, to close at 11,036.37,the S&P 500 .SPX lost 17.11 pts, or 1.43%, to 1,180.73, and the NAS .IXIC tallied up a minus 37.07 pts, or 1.46%, to end the session at 2,494.95.

Only a few pockets of strength were seen this session. Hewlett-Packard (NYSE:HPQ) 44.19, +0.94 was the only blue chip in the DJIA to post a gain. Its strength was owed to better-than-expected earnings and upside guidance.

J.Crew (NYSE:JCG) 43.99, +6.34) registered a big gain in response to news that it will be taken private for 43.50/shr in cash, a premium of about 15% relative to the prior session’s closing price. It helped limit pressure against other retailers, but the group still booked a 0.8% loss.

Oil giants Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM), each down about 2%, accounted for 15.5% of the drop in the DJIA.

The energy sector .GSPE of the S&P 500 led declines, down 1.9% as US Crude Oil futures prices fell 0.6% to settle at 81.25 bbl..

Market reaction was muted to minutes from the Federal Reserve’s policy-making panel that showed the FOMC considered even more drastic options to stimulate the economy before it settled on buying $600 billion in bonds in a second round of quantitative easing.

Fed officials revised down their forecasts for economic growth next year, and saw unemployment at higher levels than they had the last time they issued official forecasts in June.

Data earlier showed the US economy grew faster than previously estimated in Q-3, but a slump in sales of previously owned homes in October indicated the recovery remains too anemic to reduce high unemployment.

Upward revisions to third quarter GDP failed to provide fodder for buyers. The data indicated that GDP grew 2.5% from July through September. Advance data had initially indicated that GDP had increased 2.0% in that time. Economists had expected the revised data to reflect growth of 2.4%.

Reflective of the GDP data, minutes from the most recent FOMC meeting generally indicated that the economic recovery has proceeded at a modest rate in recent months. However, there has been only a gradual improvement in labor market conditions, and inflation remains low.

Among meeting members, most saw the risks to growth as broadly balanced, but some saw the risks as tilted to the downside. A majority saw the risks to inflation as balanced, but some saw downside risks. Members also differed in their assessments of the likely benefits and costs associated with the latest program of Quantitative Easing (QE-2).

Treasuries displayed strength in the early going as participants sought their relative safety, but they gave up a chunk of their gains following results from an auction of 5 yr T-Notes. The auction attracted a bid-to-cover ratio of 2.65, USD demand of $92.8B, and an indirect bidder participation rate of 31.5%.

Commodities were mixed for a 2nd straight session. Grains (+1.2%) were the largest advancing group, while industrials (-1.6%) was the largest declining group. March Cotton fell 5.1% to its lowest levels in a month.

Dec Gold rallied for 1..3% to finish at 1377.60 oz. Gold posted its biggest gains in over 2 weeks on the back of the tensions between North and South Korea. Dec Silver ended up 0.2% to 27.57 oz.

Jan Crude Oil finished lower by 0.3% to 81.25 bbl, while Dec Nat Gas ended off 0.2% to 4.26 per MMBtu.

Advancing Sectors: (None)

Declining Sectors: Energy (-1.9%), Materials (-1.7%), Financials (-1.6%), Tech (-1.5%), Consumer Discretionary (-1.4%), Industrials (-1.3%), Health Care (-1.3%), Utilities (-1.1%), Consumer Staples (-1.1%), Telecom (-0.9%

Volume and Breadth: About 7.6B/shrs traded on the NYSE, the AMEX and NAS, below the year-to-date daily average of 8.7B/shrs.  Declining stocks far outnumbered advancers on the NYSE by about 7 to 2, and on the NAS, 3 stocks fell for each one that rose.

Snap Shot of the Major World Markets