NEW YORK/LONDON US stocks sold off sharply on Friday while the dollar jumped as investors grappled with rising geopolitical tensions and persistent inflation that could lead to diverging monetary policy between the US and Europe.

MSCI's gauge of stocks across the globe was last down 1.2%, its biggest one-day drop in about six months, dragged down by US performance.

Wall Street's main indices all slumped well over 1%, with the S&P 500 posting its biggest one-day drop since Jan 31, as the first-quarter earnings season kicked off on a dour note with reports from major banks.

"We have a mix of elevated geopolitical risk, inflation worries and mild [earnings] disappointments," said Angelo Kourkafas, a senior investment strategist at Edward Jones.

Worries that Iran might retaliate for an airstrike on its embassy in Damascus that it blamed on Israel have hovered over markets, propping up oil and prompting moves into gold and other safe-haven assets. Israel did not claim responsibility for the airstrike on April 1.

US President Joe Biden said on Friday he expected Iran to attack Israel "sooner, rather than later" and warned Tehran not to proceed.

There are "concerns that there may be an attack on Israel by Iran", said Kristina Hooper, the chief global market strategist of Invesco. "Geopolitical risk has been driving a lot of the moves."

Central bank outlooks were also in focus. The European Central Bank signalled on Thursday it could start cutting rates, while a hotter-than-expected inflation reading on Wednesday pushed back bets for the Federal Reserve's (Fed) first cut until later in the year.

The dollar index gained 0.69% and hit its highest level in over five months. The euro was down 0.76%.

"We've got a dollar, US interest rate strength play, that's what's going on here," said Joseph Trevisani, a senior analyst at FX Street in New York.

The Japanese yen bucked the trend, firming 0.02% against the dollar in a rebound after hitting a 34-year low during the day as investors watched for signs of intervention from Tokyo officials.

On Wall Street, the Dow Jones Industrial Average fell 475.84 points, or 1.24%, to 37,983.24, the S&P 500 lost 75.65 points, or 1.46%, to 5,123.41, and the Nasdaq Composite lost 267.10 points, or 1.62%, to 16,175.09.

Investors were digesting results from JPMorgan, Citigroup and Wells Fargo, with the S&P 500 Banks index dropping 3.3%.

Europe's STOXX 600 index rose 0.14%.

The yield on benchmark US 10-year notes fell 5.9 basis points to 4.518% from 4.576% late on Thursday.

Fed Bank of Boston president Susan Collins is eyeing a couple of interest rate cuts this year amid expectations it could still take some time to get inflation back to targeted levels.

Market pricing implied that investors expect the Fed to reduce its main funds rate by about 48 basis points this year after traders started 2024 betting on about 150 basis points of cuts.

Oil prices rose on Middle East tensions.

US crude settled up 0.75% at US$85.66 a barrel and Brent settled at US$90.45 per barrel, up 0.79% on the day.

Spot gold lost 1.24% at US$2,343.76 an ounce, taking a breather after rising above US$2,400 per ounce to an all -time high.