After a few weeks of gains fuelled by hopes the central bank would soon take its foot off the pedal in tightening monetary policy, data this week has fanned talk that its year-long hiking campaign may have gone too far.
On Wednesday, a report from the Institute for Supply Management showed the US services sector grew less than forecast last month, while another pointed to private employers slowing their hiring pace in March.
The readings came a day after news that job openings had fallen to their lowest level since May 2021.
While traders have long hoped for a tightening of the labour market and an economic slowdown that would allow the Fed to stop lifting rates, there is now a rising concern of a deep recession.
Adding to the unease is ongoing uncertainty about the banking sector after last month's turmoil that saw two US regional banks go under and Credit Suisse taken over.
The upheaval was largely blamed on the sharp pace of rate hikes over the past year.
"While this sombre economic news might have otherwise been received as good news for the waning soft-landing crew, recent price action suggests that investors are weighing up the possibility that the US economy may have met too much resistance between higher rates and regional bank uncertainty, which could eventually tip the US into recession," said SPI Asset Management's Stephen Innes.
The prospect of a recession weighed on US markets, with the S&P 500 and Nasdaq in the red, while traders also shifted into safe-haven Treasuries.
And gold, another go-to in times of turmoil and uncertainty, stayed above $2,000 while heading towards a record high of $2,075.47 set in August 2020.
In Asia, the mood was also broadly downbeat, with business winding down ahead of the long Easter weekend.
Tokyo was weighed by a strengthening yen. Sydney, Seoul, Singapore, Taipei, Jakarta and Manila were also down.
Shanghai and Wellington were flat and Mumbai edged up slightly.
Hong Kong rebounded from early losses to rise after a one-day holiday as a private survey of services activity in China rose more than expected last month, suggesting the world's number two economy is slowly getting back up to speed.
The Caixin purchasing managers index came in at 57.8, its highest since November 2020, and well up from the 55 posted in February. Anything above 50 is considered growth.
That report came after an official reading on March PMI services last week came in at a record high.
Markets in London, Paris and Frankfurt rose in morning trade,
Focus now turns to the release of key US non-farm payroll figures on Friday, which will provide the latest snapshot of the economy and could guide the Fed's rate decision-making.
"A soft jobs report... along with a weak (consumer price index) print next week could call time on the prospect of another 25 basis point hike at the next meeting," said CMC Markets analyst Michael Hewson.
"What it is unlikely to do is precipitate a shift in Fed thinking when it comes to a rate cut, which is what markets are increasingly pricing. Inflation would need to fall much further from current levels for that to happen and that doesn't appear to be happening at the moment."
Still, while there was a glum feeling on trading floors, John Vail, of Nikko Asset Management, told Bloomberg Television: "We don't see a recession in the States this year and that will surprise some investors on the positive side."
- Key figures around 0810 GMT -
Tokyo - Nikkei 225: DOWN 1.2 percent at 27,472.63 (close)
Hong Kong - Hang Seng Index: UP 0.3 percent at 20,331.20 (close)
Shanghai - Composite: FLAT at 3,312.63 (close)
London - FTSE 100: UP 0.6 percent at 7,706.21
Euro/dollar: DOWN at $1.0903 from $1.0905 on Wednesday
Pound/dollar: UP at $1.2469 from $1.2458
Euro/pound: DOWN at 87.47 pence at 87.51 pence
Dollar/yen: DOWN at 131.30 yen from 131.35 yen
West Texas Intermediate: DOWN 0.4 percent at $80.33 per barrel
Brent North Sea crude: DOWN 0.3 percent at $84.72 per barrel
New York - Dow: UP 0.2 percent at 33,482.72 (close)
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