By Ryan Vlastelica
NEW YORK (Reuters) - Stocks slumped 1 percent in a broad selloff on Tuesday as fears Japan's nuclear power crisis could turn into a larger catastrophe drove investors to less risky assets.
Some investors, however, expected the drop to be temporary, with the U.S. economy taking only a short-term hit, although the nuclear power industry will face longer term consequences.
In a second straight day of losses tied to Japan, the S&P 500 fell to within four points of support at 1,257, which was its 2010 closing level. The U.S. benchmark index fell more than 2 percent at the start of trading and the Nasdaq composite index briefly turned negative for the year.
Equities modestly pared losses but remained sharply lower after the U.S. Federal Reserve maintained its ultra-loose monetary policy and said the economy was gaining traction.
Options activity on the iShares MSCI Japan Index fund suggested that some investors believe the sell-off could be overdone, and they are either closing out recent long put positions or opening new bullish strategies.
"It is our view at this stage that there shouldn't be sustained disruptions and this shouldn't be more than a short-term drag on the United States," said Jim McDonald, chief investment strategist at Chicago-based Northern Trust Global Investments, which has about $650 billion in assets under management.
"While the outlook of nuclear accidents is justifiably scary, other nuclear issues have had small impacts on U.S. stocks and that's the most likely scenario here."
A Japanese nuclear power plant sent low levels of radiation wafting into Tokyo, prompting people to flee the capital. Officials and markets were still trying to assess the full extent of destruction from Japan's earthquake and tsunami, with at least 10,000 people feared dead.
The Global X Uranium exchange traded fund fell 10 percent to $14.13. Shaw Group, an engineering and construction company that is part of a consortium that builds reactors, dropped 2.9 percent to $33.87 on many times its 10-day average trading volume.
Shares of General Electric Co, which has combined nuclear ventures with Japan's Hitachi Ltd, dropped 2 percent to $19.53.
"This will clearly change the risk assessment over the next one- to two-year period for the attractiveness of nuclear power," McDonald said. "This will give people pause."
The Dow Jones industrial average was down 125.29 points, or 1.04 percent, at 11,867.87. The Standard & Poor's 500 Index was down 13.21 points, or 1.02 percent, at 1,283.18. The Nasdaq Composite Index was down 31.62 points, or 1.17 percent, at 2,669.35.
More than five stocks fell for every one that rose on the New York Stock Exchange while on the Nasdaq about 80 percent of stocks were negative.
At its session low, the S&P 500 had given back more than half the gains of the latest leg of the stock market rally, from December 1 to the year's high on February 18. The S&P 500 is down about 4 percent since the start of the month after having rallied from early September. It is still up 21 percent since September.
The CBOE VIX volatility index remained up 13.4 percent in a sign of investor anxiety.
Dollar-denominated Nikkei futures fell 5.2 percent and are down more than 10 percent for the year.
Among U.S. stocks affected by Japan, insurer American International Group Inc slid 2.1 percent at $36.72, while aluminum producer Alcoa Inc lost 1.2 percent at 15.92. (Additional reporting by Doris Frankel and Rodrigo Campos; Editing by Leslie Adler)