The war of words came after North Korea's state media reported its military leaders were working on a proposal to launch four intermediate-range missiles into the sea off the small USA territory of Guam.
"Ahead of the USA inflation numbers gold will likely trade sideways until there's more direction", said Fawad Razaqzada, an analyst at FOREX.com.
The broad-based S&P 500 was hit even harder, dropping 1.5 percent to close at 2,438.22, while the tech-rich Nasdaq Composite Index lost 2.2 percent 6,216.87.
Hong Kong led the sell-off, slumping 2.04 per cent, while Shanghai slipped 1.63 per cent. Seoul shed 1.69 per cent, Jakarta fell 1.03 per cent, and The Straits Times Index lost 1.31 per cent. Small-company stocks fell more than the rest of the market.
The Dow ended a nine-day streak of closing records, falling by 0.24%, while the Nasdaq fell by just under half a percent and the S&P was down by 0.21%.
Next on watch is USA inflation data, scheduled for Friday, which is expected to take investors' focus back to Federal Reserve monetary policy.
The dollar index .DXY rose 0.23 percent, with the euro EUR= down 0.39 percent to $1.1747. The precious metal had climbed 1.3 per cent in the previous session, its biggest gain since mid-May, and touched $1,278.66 an ounce, its highest level since June 14.
Amid the hot rhetoric, US stocks sold off sharply on Thursday, with the S&P 500 falling more than 1 percent.
USA trading volume has been low with summer setting in and Congress expected to be in recess until September 5. The yield on the 10-year Treasury note rose to 2.27% from 2.26%. The 30-year bond last rose 28/32 in price to yield 2.7759 percent, from 2.818 percent late on Wednesday.
Oil prices settled lower after a volatile session on increasing exports from key OPEC producers and news of lower crude shipments from Saudi Arabia. "Limited news flow is what can be blamed for the narrow trading ranges, but expect this to change as we get closer to Friday's U.S. CPI release".
USA crude shed 12 U.S. cents to US$49.05 a barrel, while Brent crude fell 18 United States cents a barrel at US$51.96 a barrel.
Meanwhile, shares of Kraft Heinz rose as the U.S. food and beverage company, which has struggled with flagging sales, and Oprah Winfrey announced a new line of "four "flavourful soups and four savoury sides" under the name O, That's Good! as part of a previously-announced partnership between the two".
USA stock index futures fell, with the S&P 500 indicated to open down 0.4 percent after share prices fell in Europe and Asia.
Nordstrom shares were up 1.63 percent at $45.60 following the apparel retailer's better-than-expected quarterly same-store sales.
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