By Akane Otani 

A rout in global financial markets deepened Tuesday, sending the Dow Jones Industrial Average down more than 700 points and heightening the anxiety of investors around the world.

For much of the past several weeks, money managers have been fixated on one issue: the potential for a growing coronavirus epidemic to hit global economic activity.

Hope that health officials would be able to contain the epidemic, resulting in only a short-term disruption to growth, had helped keep stocks near all-time highs up until just last week. But in the past two days, that optimism has increasingly turned into skepticism -- wiping out hundreds of billions of dollars from the U.S. stock market and sending the yield on the benchmark 10-year U.S. Treasury note to a record low.

"Every effort at a snapback rally has been just as quickly pushed back down," said Frank Cappelleri, executive director of brokerage Instinet.

The Dow Jones Industrial Average fell 745 points, or 2.7%, to 27215, heading toward its worst two-day stretch of selling in two years. The S&P 500 fell 2.5% and the Nasdaq Composite lost 2.2%.

The market had showed signs of fragility well before stock exchanges even opened for trading in New York. Futures tied to the S&P 500 and Dow Jones Industrial Average had rallied overnight, seeming to point to a potential rebound for the stock market in the hours ahead. But the gains proved fickle--with much of them fading by sunrise. By the end of the first hour of the trading day, all three major stock indices had erased the entirety of their advances.

"The fact that [futures' gains] didn't even get through the night--it probably put a lot of traders on edge," Mr. Cappelleri said.

Tuesday's selling accelerated after reports showed the disease had spread even further, with countries from Switzerland to Austria to South Korea reporting new infections. As stock indexes dropped, the Nasdaq briefly wiped out its gain for the year.

Meanwhile, the yield on the benchmark 10-year U.S. Treasury note -- used as a reference rate for everything from mortgages to student loans -- settled at a record low.

"The size of this economic shock is looking increasingly large on a global scale," said James Athey, a senior investment manager at Aberdeen Standard Investments. "What we're just seeing here is the crack in that sentiment-driven equity rally."

Among the biggest decliners in the stock market Tuesday: shares of companies whose profits are vulnerable to slowdowns in consumer spending and travel.

Bank stocks retreated, with Citigroup and Bank of America both down more than 3% apiece and posting losses of more than 10% for the year. The continued slide in long-term bond yields threatens to cut into banks' lending profitability.

Energy shares also tumbled. The S&P 500 energy sector is trading down 18% for the year, hurt by fears that a slowdown in global economic activity will drag oil prices lower.

Meanwhile, traders placed bets on further volatility. The Cboe Volatility Index, which tracks expectations for swings in the S&P 500, jumped 15% to bring its year-to-date gain to 108%.

"I just don't think we can accept the numbers coming out of China at face value," said Mark Grant, managing director and chief global strategist at B. Riley FBR.

With little clarity on the severity of the epidemic, as well as uncertainty about if officials will be able to effectively contain it, Mr. Grant said he wouldn't be surprised if there was further volatility across markets.

Investors had largely begun the year with hopes that the global economy would stabilize given a cooling of trade tensions between the U.S. and China and central banks' willingness to hold interest rates at low levels.

But the coronavirus epidemic is throwing into question many firms' projections for growth, raising the possibility of a longer-term disruption to economic activity.

The head of the International Monetary Fund said Tuesday that the fund was downgrading its global-growth projections, as well as trying to figure out if the economic fallout stemming from the epidemic would primarily occur in the first quarter of the year.

Elsewhere, the Stoxx Europe 600 ended down 1.8%, closing out its worst four-day stretch since 2016, after having fallen more than 3% Monday.

China's Shanghai Composite Index lost 0.6%, while Japan's Nikkei Stock Average, which was closed Monday, fell 3.3%.

"This virus doesn't respect borders. There's no real reason to expect it's going to be easy to contain," said Jan Lambregts, global head of financial markets research at Rabobank. "The real economic impact of this is going to be felt."

Caitlin Ostroff contributed to this article

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

February 25, 2020 15:16 ET (20:16 GMT)