The S&P/TSX composite index dropped 169.09 points or 1.33 per cent to 12,591.21 with all sectors in the red, and the main Toronto index back to where it started this month.
"The law of unintended consequences and the history of previous military interventions in the region is not a recipe for political and economic stability," observed Neil MacKinnon, global macro strategist at VTB Capital in New York.
Selling pressure extended to most financials even as two big Canadian banks turned in strong earnings reports.
"People’s attention is elsewhere right now," said Norman Raschkowan, North American strategist at Mackenzie Financial.
"I think people have been expecting generally that the banks will have good numbers and... we’re off to a good start in terms of the banks reporting this week."
Bank of Montreal (TSX:BMO) posted net income of $1.137 billion or $1.68 cents per share, up from $970 million or $1.42 per share in the same year-earlier period. Revenue rose to $4.05 billion from $3.88 billion. Analysts expected $1.52 in adjusted earnings per share and revenue of $3.96 billion. BMO shares added 27 cents to $66.05.
Scotiabank (TSX:BNS) increased its quarterly dividend by two cents to 62 cents per share and posted quarterly net income of $1.768 billion or $1.37 per diluted share, compared with net income of $2.051 billion or $1.69 per diluted share a year ago. Revenue rose to $5.52 billion from $5.51 billion. Last year's results benefited from an after-tax gain of $614 million on the sale of Scotia Plaza in Toronto. Ex-items, profit rose 17 per cent to $1.32 a share, beating estimates by two cents but its shares slipped 98 cents to $57.71.
The Canadian dollar erased early losses and closed up 0.26 of a cent at 95.47 cents US. The greenback was stronger against many currencies as traders sought the perceived safe haven of the U.S. currency but the loonie found support from higher gold and oil prices.
U.S. indexes were also sharply lower, a day after U.S. Secretary of State John Kerry claimed it was "undeniable" that the Syrian government had used chemical weapons. The prospect of U.S.-led military action against the Assad regime was enough for investors to cut their exposure to risky assets such as stocks and the Dow Jones industrials fell 170.33 points to a two-month low of 14,776.13.
The Nasdaq was down 79.05 points to 3,578.52 while the S&P 500 index lost 26.3 points to 1,630.48.
"Obviously the concern is that if you get any sort of increase in military activity and the Americans get involved, you might see consumers batten down the hatches a bit just as a sort of reflex response," added Raschkowan.
"But there is also the concern about what it means for oil prices and global economic growth."
On the economic calendar, traders took in data showing rising American consumer confidence. The U.S. Conference Board's August index came in at 81.5, up from 80.3 in July.
The reading added to speculation about whether the Federal Reserve thinks the economy is strong enough to allow it to start to reduce its monetary stimulus next month.
At present, the Fed is buying $85 billion of financial assets a month in order to lower long-term interest rates and shore up the U.S. economic recovery. Up until recently, a run of data, particularly related to the labour market, had ratcheted up expectations that the so-called tapering will begin in September.
Geopolitical worries boosted bullion prices with the December contract on the Nymex running ahead $27.10 to US$1,420.20 an ounce. But that gain failed to translate into a gain for gold miners and the sector fell more than four per cent with Goldcorp (TSX:G) faded $1.52 to C$31.35 while Barrick Gold Corp. (TSX:ABX) backed off 88 cents to $20.64.
The base metals component fell almost four per cent even as signs of improving economies in the U.S. and China pushed copper prices higher with the September contract in New York up one cent at US$3.33 a pound.
Other data Tuesday showed that the Standard & Poor’s/Case-Shiller 20-city home price index rose 12.1 per cent in June from a year earlier, nearly matching a seven-year high.
And China's National Bureau of Statistics said that profit growth for industrial companies ran ahead to 12 per cent in July from 6.3 per cent in June.
The October crude contract on the New York Mercantile Exchange ran ahead $3.10 to US$109.02 a barrel.
The price of oil has risen more than 15 per cent in the past three months on concern that unrest in Egypt and civil war in Syria could disrupt production and exports, especially in Libya and Iraq. It has also raised the spectre of spreading violence that could block important supply routes.