The sell-off was tempered, however, after the Fed released its meeting minutes, indicating interest rates would not be raised at a faster-than-expected pace. That tipped the Dow, S&P 500, Nasdaq and Russell 2000 indexes to close slightly positive.
"The stock market seems to have reacted positively to it," said Michael Arone, chief investment strategist at State Street Global Advisors in Boston. "Part of what's driving that is the market was bracing for the meeting minutes to be a bit more hawkish than they are."
The Dow Jones Industrial Average rose 52.4 points, or 0.21 percent, to 24,886.81, the S&P 500 gained 8.85 points, or 0.32 percent, to 2,733.29 and the Nasdaq Composite added 47.50 points, or 0.64 percent, to 7,425.96.
Broad risk aversion hurt the dollar against the Japanese yen. The Japanese currency strengthened 0.73 percent versus the greenback at 110.10 per dollar.
But the greenback managed to rise to a six-month high against the euro on data indicating a slowdown in European business activity before paring gains after Wednesday's Fed minutes release.
The pan-European FTSEurofirst 300 index lost 1.16 percent and MSCI's gauge of stocks across the globe shed 0.31 percent.
Another reason for the euro's woes is Italy, where an incoming coalition government comprised of the two anti-establishment parties - the League and 5-Star - looks likely to implement big-spending policies.
That could add to the country's big debt pile and cause Rome to clash with the European Union.
Investors were also eyeing Turkey, whose central bank raised interest rates by 300 basis points in an emergency move to put a floor under the plunging lira currency.
Turkey's central bank, which had been scheduled to hold its next policy-setting meeting on June 7, said it had increased its top interest rate to 16.5 percent from 13.5 percent.
The lira has fallen about 20 percent so far this year to a series of record lows, but the currency reversed course after the central bank decision and was about 2 percent firmer on the day at 4.5717 to the dollar at 1637 GMT.
Still, the lira is "not out of the woods yet," said Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman in New York.
"The relief is unlikely to last, especially if emerging markets continue to be under pressure,” Thin said. "The (Turkish) central bank will see how markets react and it will be important how they react when Europe opens" on Thursday.
Investors have sold off their lira holdings on concerns about loose monetary policy, particularly after recent comments by President Tayyip Erdogan, a self-described "enemy of interest rates."
That sell-off spurred a rally in U.S. Treasuries as concerns about the tumbling lira boosted demand for low-risk debt.
In other trading, oil fell after an unexpected build in U.S. crude and gasoline inventories despite strong demand, and as traders weighed the possibility of an increase in OPEC crude output to cover any shortfalls in supply from Iran and Venezuela.
Brent crude futures slipped 23 cents to settle at $79.80 a barrel, while U.S. crude lost 36 cents to $71.84 a barrel.
(Additional reporting by Chuck Mikolajczak, Herb Lash and Rodrigo Campos in New York. Editing by Chizu Nomiyama and Dan Grebler) ((Laila.email@example.com; (917) 809-0054))