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NEW YORK (Reuters) - Stocks on major markets and the U.S. dollar sold off while bond yields fell on Wednesday as investors fled risky assets amid uncertainty about U.S. President Donald Trump's ability to deliver on his tax and banking reforms and infrastructure spending.
Reports that Trump asked then-Federal Bureau of Investigation Director James Comey to end a probe into the former national security adviser have raised questions over whether Trump tried to interfere with a federal investigation.
U.S. stock market declines accelerated in afternoon trading, and major U.S. indexes ended near session lows. The Dow Jones industrial average fell 372 points, and both the Dow and S&P 500 suffered their worst percentage drops since Sept. 9.
The CBOE Volatility index .VIX, the most widely followed barometer of expected near-term stock market volatility, ended above the 15 level in its highest close since April 13. The U.S. dollar index .DXY has now erased its post-election gains.
A small but growing number of Trump's fellow Republicans called on Wednesday for an independent probe of possible collusion between his 2016 campaign and Russia.
The news came after a tumultuous week at the White House when Trump unexpectedly fired FBI director Comey and reportedly disclosed classified information to Russia's foreign minister about a planned Islamic State operation.
Optimism over pro-growth economic policies under Trump helped drive a sharp rally in U.S. stocks after the Nov. 8 U.S. election. Even with Wednesday's declines, the S&P 500 stock index is up 10.2 percent since last November's U.S. elections though.
"It's certainly a day when the chickens are coming home to roost," said Donald Selkin, chief market strategist at Newbridge Securities in New York.
"The (equity) bull market is not over by any means, but between the political stuff and the fact that the next earnings season is three months away, there's going to be a lack of motivation."
The Dow Jones Industrial Average .DJI was down 372.82 points, or 1.78 percent, to end at 20,606.93, the S&P 500 index .SPX lost 43.64 points, or 1.82 percent, to 2,357.03 and the Nasdaq Composite .IXIC dropped 158.63 points, or 2.57 percent, to 6,011.24.
The Nasdaq had its worst day since June 24. Both the Dow and S&P 500 fell below their 50-day moving averages for the first time since April 21.
While previous threats to Trump's plans have rattled investors, they had failed to cause any significant pull back in stocks. The VIX last week closed at 9.77, its lowest close since December 1993.
Bank stocks, which outperformed in the post-election rally, were the worst hit on Wednesday. The S&P 500 financial sector .SPSY tumbled 3 percent.
At nearly 18 times forward earnings, the S&P 500 trades at a significant premium to its long-term average valuations of 15 times, according to Thomson Reuters data.
MSCI's gauge of stocks across the globe .MIWD00000PUS fell 1.2 percent, while European shares .FTEU3 ended down 1.4 percent.
"It's registering with more investors that it's going to be hard to get back on track with the latest allegations," Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.
Prices of bonds, seen as safe-haven assets, rallied, while yields were on track for their biggest daily percentage drops since July.
Benchmark 10-year notes US10YT=RR gained a full point in price to yield 2.22 percent, the lowest since April 21, and down from 2.33 percent late on Tuesday.
The dollar index, which tracks the U.S. currency against six peers and had scaled a 14-year peak of 103.82 .DXY on Jan. 3, fell 0.6 percent to its lowest level since Nov. 9, surrendering all of its "Trump bump" gains. The dollar also fell by nearly 2 percent against the yen.
In commodity markets, safe-haven gold XAU= hit a two-week high, while oil prices were higher. Spot gold rose for a fifth day and was up 1.8 percent at $1,258.38 an ounce.
Brent crude LCOc1 gained 1.1 percent to settle at $52.21 per barrel, while U.S. light crude CLc1 rose 0.8 percent to settle at $49.07.
Additional reporting by Vikram Subhedar in London, Sinead Carew in New York and Noel Randewich in San Francisco; Editing by Hugh Lawson and Nick Zieminski