U.S. stocks steepened their decline Tuesday after the Federal Reserve downgraded its U.S. economic projections in the minutes of its latest meeting, citing worse than expected growth. The Dow Jones Industrial Average tumbled 159 points, or 1.4%, to 11020 Tuesday. Markets had fallen earlier in the day after a skirmish between North Korea and South Korea and as worries lingered over the stability of euro-zone debt. Stocks fell further Tuesday after minutes showed central bank officials downgraded their assessment of the U.S. economy at their last meeting three weeks ago.

The Fed expects the economy to grow at a moderate pace next year, with unemployment staying disappointingly high and inflation uncomfortably low. The market may also be disappointed that the central bank didn't give more details about how it will evaluate and potentially adjust the scope of the $600 billion bond buying program it announced earlier this month. The market's reaction to the program, known as quantitative easing or QE2 has been mixed, as some have worried the bond purchases could spur inflation. The Nasdaq Composite fell 1.6% to 2493.

The Standard & Poor's 500-share index slid 1.5% to 1180, dragged lower by its energy and materials sectors. Unsettling the market Tuesday, North Korea fired artillery at a South Korean island near a disputed western maritime border on Tuesday, killing two South Korean marines and setting numerous buildings on fire. A South Korean military unit on the island returned fire, while South Korean military officials scrambled fighter jets.

Meanwhile, investors continued to worry over the debt situation in the euro zone, where the focus is shifting to Portugal and Spain after Ireland agreed to a bailout package on Sunday. U.S. gross domestic product rose 2.5% in July through September, the Commerce Department reported, up from its initial estimate of 2.0% growth in the third quarter. Economists were expecting GDP would be revised up to show a 2.4% growth rate. Existing home sales slipped 2.2% to a seasonally adjusted annual rate of 4.43 million, worse than economists expected.

Among stocks in focus, Hewlett-Packard was one of only three Dow components that managed to rise, gaining 0.7% after it reported strong fiscal fourth quarter results and issued a better than expected forecast. J. Crew Group jumped 17% as private equity firms TPG Capital and Leonard Green & Partners agreed to acquire the clothing retailer for $43.50 a share in cash, or about $3 billion.

European markets

European stocks posted steep losses Tuesday, as an exchange of artillery fire between North and South Korea added to worries for investors already on edge over the debt situation in peripheral European countries. The Stoxx Europe 600 index dropped 1% to 265.18, with banks and mining stocks posting the heaviest losses. The sell off in Ireland, Portugal and Spain was particularly pronounced. In Dublin, the ISEQ index dropped 2.5%.

Portugal's PSI 20 fell 2% and Spain's IBEX 35 slumped 2.4%. The falls came after North Korea fired dozens of shells at a South Korean island, setting structures alight and prompting the South to return fire. The exchange also resulted in South Korea moving to its highest level of peacetime alert, Reuters reported. Bank stocks led the decline in Dublin, with Bank of Ireland slumping 28% and Allied Irish Banks down 16%.

The falls came after Patrick Honohan, governor of the Central Bank of Ireland, reportedly said selling the banks to foreign buyers may be a desirable course of action. Other European banks also traded lower, with Asia-focussed Standard Chartered PLC falling 2.2% in London and Societe Generale dropping 3.5% in Paris.

In Madrid, shares of Banco Santander slumped 3.4% and those of rival Banco Bilbao Vizcaya Argentaria slid 3.3%. Among the main European equity benchmarks, the U.K.'s FTSE 100 Index dropped 1.1% to 5,620.23 and the French CAC 40 fell 1.9% to 3,747.16. The German DAX 30 index slid 1.1% to 6,750.74. Mining stocks were among the other heavy decliners. In London, Vedanta Resources PLC dropped 3.7% and Antofagasta PLC fell 2.9%.

Asian markets

Asian markets fell Tuesday, with investors wary of the potential for hostilities in the region following an exchange of artillery fire between North and South Korea. China's Shanghai Composite dropped 1.9% and Hong Kong's Hang Seng Index shed 2.7%, closing below 23,000 for the first time since October. Markets in Japan were closed for a public holiday.

North Korea fired artillery at South Korea's Yeonpyeong island in the Yellow Sea off the countries' west coast Tuesday afternoon, setting houses on fire. South Korea returned fire military officials said. South Korea's Kospi Composite declined 0.8%, but news of the shelling unfolded after the close of the domestic financial market. Stocks in Asia were generally weaker before the North Korean headlines, on concerns that China may introduce further tightening moves and over Europe's debt crisis.

Selling accelerated on the news of the Koreas' exchange of fire. Shares of metals companies led the losses in China, tracking weakness in base metals. Jiangxi Copper shares dropped 5.3% and Yunnan Chihong Zinc & Germanium was down 5.1%. In Hong Kong, property firms continued to fall on the Hong Kong government's property tightening measures issued after the market closed Friday. Cheung Kong was down 4.5%, Sino Land shed 3.8% and Sun Hung Kai Properties fell 3.3%.

Base metals

Base metals on the London Metal Exchange closed broadly lower Tuesday in European trading due a stronger dollar against most currencies as investors continued to fret about the future of the euro zone and tensions between North and South Korea escalated following a deadly artillery exchange.

Traders and analysts also said metal prices are set for an even steeper correction as investors take profit and adjust their portfolios before the end of the year. On Tuesday benchmark LME copper for delivery in three months dropped nearly 3% compared to Monday's kerb PM close before paring back some of its losses. Lead dropped as much as 3.8%.

Crude oil futures prices fell Tuesday, weighed down by tensions on the Korean peninsula and worries about European sovereign debt. Light, sweet crude for January delivery on the New York Mercantile Exchange settled 49c lower at $81.25 a barrel.

Comex gold prices climbed into positive territory as investors purchased the safe harbor asset on reports of artillery fire between North and South Korea and concerns over Europe's sovereign debt troubles. The most actively traded contract, for December delivery, settled up 1.5%, or $19.80, at $1,377.60 a troy ounce on the Comex division of the New York Mercantile Exchange.

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