The FTSE 100 index dropped 1.1 per cent to a three-month low on Friday amid rising geopolitical tensions, with financials, miners and energy firms the biggest weights among blue chips.
The local market followed the lead of Wall Street and Europe's retreat from the escalating tensions between the U.S. and North Korea with the ASX 200 and All Ordinaries both falling around 1.2 per cent.
While the Russell 2000 index ended up 0.1 percent on the day, it was more than 5 percent below its July 25 record close and for the week it fell 2.7 percent, its biggest weekly drop since February 2016.
U.S. stocks ended lower on Thursday, and Asian markets fell sharply, with Hong Kong's Hang Seng index dropping 2%.
North Korea said it was completing plans to fire four intermediate-range missiles over Japan to land near the US Pacific island territory of Guam in an unusually detailed threat that further heightened tensions with the United States.
Although Japan could be in the front line of any clash with North Korea, the yen is benefitting because Japan is the world's biggest creditor nation and Japanese investors tend to repatriate funds in times of stress, attracting other flows.
CURRENCIES: The euro slipped 0.1 percent to $1.1176 while the dollar was steady at 109.20 yen. Shanghai's main index also tumbled 1.6 percent to 3,208.54 while Australia's S&P/ASX 200 dropped 1.2 percent to 5,693.10.
The negative headlines provided many investors with an opportunity to pocket some of their recent gains following a string of record highs fueled by strong corporate earnings.More news: Mourinho confirms United in talks over Ibrahimovic return
Several indexes closed lower overnight.
The dollar was further weighed down on Friday by the soft U.S. inflation data.
Later on Friday, investors will look to US July consumer price data for hints on the Fed's policy outlook and near-term moves in the dollar.
Market participants are also nervous about escalating tensions between the USA and North Korea.
"Tensions are high. Markets have taken a little notice", said Greg McKenna, an analyst at AxiTrader.
United States producer prices unexpectedly recorded their biggest drop in almost a year, and the number of Americans filing for unemployment benefits unexpectedly rose last week. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, dipped by 2.3 basis points to 2.189%.
After touching a more than two-month high, spot gold last added 0.3 percent to $1,290.00 an ounce. To Reuters citing Peter Kenny, in charge of the market strategy in Global Markets Advisory Group, " market participants are looking for any reason for a reset of course.
In commodities, US. crude fell 0.67 per cent to $49.23 per barrel and Brent was last at $52.58, down 0.23 per cent on the day.