By Chris Dieterich 

Financial markets were rattled by geopolitical flare-ups on Thursday, sending U.S. stocks tumbling to their worst losses in months and investors reaching for the safety of gold and Treasury bonds.

Stocks slid to session lows around midday after a Malaysia Airlines passenger jet crashed near the Russia-Ukraine border. Selling accelerated late in the day after the Israeli military began a ground invasion into the Gaza Strip.

The Dow Jones Industrial Average finished down 161.39 points, or 0.9%, to 16976.81, its biggest one-day slide in two months.

The S&P 500 shed 23.45 points, or 1.2%, to 1958.12 and the Nasdaq Composite Index dropped 62.52 points, or 1.4%, to 4363.45.

The yield on benchmark 10-year U.S. Treasury notes fell to 2.475%, down from 2.549% late Wednesday. Bond prices move in the opposite direction as yields. Gold futures rose 1.3% to settle at $1,316.70 a troy ounce. Crude-oil futures added 1.8% to $103.13 a barrel, the most in a month. Investors often buy gold and low-risk bonds to hedge riskier investments during times of political or economic instability.

"You've got a ton of geopolitical risks out there," said Phil Orlando, chief equity strategist at Federated Investors. "Any one of these is a tinderbox that could explode."

Thursday's declines provided a jolt to investors who in recent weeks had grown accustomed to steady gains for U.S. stocks in mostly placid trading. The Dow notched its 15th record high of the year on Wednesday, capping a stretch of gains that coincided with signs of an improving U.S. economy and firm corporate earnings. Thursday marked the first time that the S&P 500 rose or fell more than 1% since April 16, a stretch of calm trading last seen in 1995.

Investors said that Thursday's sharp losses underscored the cautious tone that persists even as stocks have reached new highs. Concerns about potential changes to the Federal Reserve's monetary policy in the coming months, as well as over the valuations for the riskiest part of the stock market, have kept investors on edge.

Michael Palmer, options specialist at Group One Trading, an options market maker in the CBOE Volatility Index, said he saw a "considerable spike in activity" as news reports about Ukraine rushed in. The VIX, an options-based measure of future swings in the S&P 500, surged 32% in recent trading, on pace to 14.54, its biggest one-day rise of the year.

"The S&P dropped like a rock as soon as [the passenger jet news] came out," said Scott Wren, senior equity strategist at Wells Fargo Advisors. "These things can come out of nowhere."

Still, investors voiced skepticism that Thursday's developments could derail the market rally. Mr. Wren said he's telling his retail clients that, with the U.S. and global economies improving, stocks look like strong investments.

"We don't think that this situation in and of itself will lead to a continued, meaningful selloff," Mr. Wren said. "But I would welcome a pullback right now -- our view is that a year from now the market is going to be higher."

Ukraine's state air traffic control service confirmed that a Malaysia Airlines plane carrying 295 passengers had crashed and said a special investigation commission has been rushed to the scene. An adviser to Ukraine's interior ministry alleged that pro-Russia rebels were responsible, while a leader for the self-proclaimed Donetsk People's Republic accused Ukrainian forces of shooting down the plane.

"This is bringing it up to another level," said Frank Ingarra, head trader at NorthCoast Asset Management. "It's putting people on edge: is this getting to a red line where this is no longer a regional conflict anymore?"

Geopolitical events diverted the attention of investors away from corporate earnings and domestic economic data. A July survey on manufacturing conditions in the mid-Atlantic region rose to its highest reading in over three years. Separately, U.S. jobless claims fell more than expected to 302,000 in the latest week.

One soft spot was U.S. home construction, which fell 9.3% in June. Housing starts sank last month to 893,000, the weakest showing since September 2013.

In corporate news, UnitedHealth Group reported better-than-expected revenue and growth in its public and senior markets. Shares rose 1.6%.

Morgan Stanley shares fell 0.6% after the bank posted a 97% surge in second-quarter profit. The firm's wealth-management and investment-banking businesses helped counter a slump in trading revenue.

Microsoft rose 1% after disclosing plans to eliminate up to 18,000 jobs over the next year and book a restructuring charge of $1.1 billion to $1.6 billion.

Write to Chris Dieterich at christopher.dieterich@wsj.com

Morgan Stanley (NYSE:MS)
Historical Stock Chart
From Mar 2024 to Apr 2024 Click Here for more Morgan Stanley Charts.
Morgan Stanley (NYSE:MS)
Historical Stock Chart
From Apr 2023 to Apr 2024 Click Here for more Morgan Stanley Charts.