The Chicago Board Options Exchange Volatility Index, also referred to as the investors,' fear gauge, climbed 6.3 per cent to 12.04, after a 9.8 per cent increase on Monday.
"It's more that there are no reasons to buy rather than a lot of reasons to sell," Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, told Reuters. "We've had such a move recently that buyers are exhausted at a time when we were already due for a pullback."
In a sign that US interest rates might not be destined to move higher just yet, even as the June jobs data were stronger than expected, Minneapolis Fed President Narayana Kocherlakota stressed the importance for policy makers to remain accommodative to further help lower the unemployment rate.
"I currently see the probability of inflation's averaging more than 2 per cent over the next four years as being considerably lower than the probability of inflation's averaging less than 2 per cent over the next four years," Kocherlakota said in a speech in Minneapolis. "And that's why I conclude my discussion of inflation by saying that the FOMC is undershooting its price stability goal."
"The current unemployment rate remains above most forecasts of its expected long-run level," he said. "Personally, I expect that, over the long run, the unemployment rate will converge to just over 5 per cent. But I would say that this measure could well overstate the degree of improvement in the US labour market."
The US sold US$27 billion of three-year notes as the highest auction yield in more than three years drew investors.
In Europe, the Stoxx 600 Index sank 1.4 per cent, as did Germany's DAX and France's CAC 40. The UK's FTSE 100 dropped 1.3 per cent.
Shares of Air France-KLM slumped 8.7 per cent after the airline downgraded its full-year earnings forecast.
"While not representing a turning point in market trends, the June traffic figures published today as well as bookings for July and August nevertheless reflect the over-capacity on certain long-haul routes, notably North America and Asia, with the attendant impact on yields," the company said in a statement.
"This comes on top of the persistently weak cargo demand and the challenging situation in Venezuela identified in the first quarter."