The Standard & Poor's 500 index fell 35 points, or 1.4 percent, to 2,438, its biggest drop since mid-May.
Aug 11 (Reuters) - U.S. stocks were modestly higher in late morning trading on Friday as investors cautiously dipped back into riskier assets, after a three-day losing streak on concerns over escalating tensions between the United States and North Korea. The yield on three-year Treasurys fell 2.0 basis points to 1.804 percent and the return on benchmark five-year government bonds shed 2.0 basis points to 2.004 percent.
The Dow Jones Industrial Average dropped 204.69 (nearly one percent), closing the session at 21,844.01.
The greenback also came under pressure after New York Federal Reserve President William Dudley cautioned it would "take some time" for USA inflation to reach the bank's two percent target.
"I will tell you this, North Korea better get their act together or they're going to be in trouble like few nations ever have been in trouble in this world", Trump said.
Until this week, the equity market had managed to shake off negative news, including previous saber-rattling over North Korea and failures in Washington to pass high-profile bills, such as repealing and replacing Obamacare.
For the week, the Dow is down 1.1%, its biggest one-week drop since November.
Still, the S&P 500 is on track to post its biggest weekly loss in about nine months.
Apart from geopolitical worries, some technical analysts like Tom McClellan, editor of the McClellan Market Report, blamed seasonality for this week's retreat given August's record as a weak month for stocks.
"The war of words between Donald Trump and North Korean officials has stepped up in recent days and has put investors on edge, prompting a more risk averse approach in the markets", said Oanda analyst Craig Erlam.
The CBOE Volatility Index, a barometer of expected near-term stock market volatility, closed at its highest since the USA presidential election on Thursday, but was down 1.22 points at 14.82 points on Friday.
10-Year Treasury Yield 2.20% -0.03%. Consumer-focused companies and technology stocks slumped. On Thursday, fellow newly public company Blue Apron Holdings lost 18% after the meal-kit maker reported rising costs amid increased competition. Shares of Macy's lost 10% and Kohl's fell 5.8%. It has been more than a year since the last 5% downdraft in stocks and more than 76 weeks since the stock market suffered a 10% loss. And that helped limit the losses in Europe.
An editorial in China's state-run Global Times (http://www.globaltimes.cn/content/1060791.shtml), published late Thursday local time, added to the pressure on Asian markets. The company delivered revenue of $1.46bn which beat expectations of $1.42bn. That put it at its highest level since the U.S. election in November, as investors piled into safe haven assets such as gold and bonds.