NEW YORK (Reuters) - U.S. stocks fell on Tuesday as signs grew of an impending military strike against Syrian President Bashar al-Assad's forces in retaliation for a chemical weapons attack on civilians last week.
Western sources who attended a meeting in Istanbul between envoys of an alliance opposed to Assad and the Syrian National Coalition said "action to deter further use of chemical weapons by the Assad regime could come as early as in the next few days.
Adding to the rising tension, Defense Secretary Chuck Hagel said in a television interview with the BBC the U.S. military is ready to act immediately should President Barack Obama order action against Syria.
"This will create a temporary dip, but the economic backdrop around the world is actually getting better," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.
"This will pass in a short number of days and the market will move higher before the end of the year," he said.
The Dow Jones industrial average fell 117.3 points or 0.78 percent, to 14,829.16, the S&P 500 lost 18.17 points or 1.1 percent, to 1,638.61 and the Nasdaq Composite dropped 48.785 points or 1.33 percent, to 3,608.786.
U.S. Secretary of State John Kerry on Monday laid the groundwork for possible action against Assad's government, calling for accountability over what he called a "moral obscenity."
Kerry's words triggered a flight to safety in financial markets, with U.S. stocks turning lower in the last hour of trading on Monday. Asian stocks fell overnight and European shares were sharply lower despite a 16-month high in a measure of German business sentiment.
Investor angst was reflected in a near 15 percent rise on the CBOE volatility index .VIX in the last two days.
The possibility of military action in Syria is highly disruptive of markets "because it's bringing in Russia, and that complicates things tremendously," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.
The U.N. Security Council has been deadlocked on Syria since 2011. Russia and China have vetoed three resolutions condemning Assad and calling for punitive steps against his government.
Gold prices were near a 12-week high and the yen rose as the geopolitical tension lured investors towards safe-haven buying.
The PHLX gold and silver index .XAU rose 2.5 percent and it is up 8 percent in the past four days.
On Wall Street, five days after a glitch that paralyzed Nasdaq-listed stocks for three hours on all U.S. markets, rivals Nasdaq OMX (NDAQ.O) and NYSE Euronext NYX.N have a different understanding of what happened in the period preceding and during the blackout, with each side blaming the other for the outage, according to sources.
Shares of J.C.Penney (JCP.N) fell 0.3 percent to $13.33 a day after hedge fund manager William Ackman, the biggest share holder, said he had sold his entire stake after his campaign to overhaul the retailer failed.
Goldman Sachs (GS.N) lost tens of millions of dollars after a computer glitch led to a flood of erroneous options trades last week, a source close to the matter said on Monday. Goldman shares fell 1.6 percent to $155.44, slightly underperforming the S&P financial sector .SPSY which fell 1.3 percent.
Shares of Tiffany & Co (TIF.N) rose 1.2 percent to $82.68 after the U.S. jeweler reported a higher quarterly profit and raised its full-year forecast.
U.S. Treasury Secretary Jack Lew said it was essential for Congress to raise the debt ceiling by mid-October or the country will face an unprecedented default, and warned the administration would not allow for it to be used as political leverage.
Lew said it was essential to avoid a repeat of 2011, the last time a debt limit stalemate played out and pushed the government to the brink of a shutdown. The stalemate triggered a downgrade of the U.S. credit rating, which in turn translated to a sharp equity selloff two years ago.
Data showed U.S. single-family home prices rose in June, though the pace of gains slowed slightly, while consumer confidence rose in August, beating expectations as consumers' outlook for the future improved.
Reporting by Rodrigo Campos, additional reporting by Chuck Mikolajczak; Editing by Chizu Nomiyama and Kenneth Barry