US stocks lose all gains made in 2015 on rate rise fear

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(Close): Shares in the US fell sharply on Tuesday, as investors fretted that the Federal Reserve could raise interest rates earlier than expected.

A strengthening dollar, which could hurt US exports, also hurt markets.

The Dow Jones fell 332.78 points, or 1.85%, to 17,662.94, while the broader S&P 500 dipped 35.26 points, or 1.7%, to 2044.17. Both indexes erased all the gains made so far in 2015.

The tech-focused Nasdaq shed 82.64 points, or 1.67%, to 4,859.79.

The US dollar continued strengthening, rising 1.4% to 12-year highs against the euro.

The strength of the dollar has worried some investors, because it could hurt the profits of US firms which do business abroad, as their overseas earnings are worth less when converted from foreign currencies.

A strong dollar also makes it harder for US firms to compete with rival firms in other countries, which may be able to offer products more cheaply.

Meanwhile, the looming prospect of an interest rate rise by the Federal Reserve is bad news for some firms, which have benefited from being able to borrow very cheaply as a result of record-low rates.

The falls in US shares echoed earlier falls on European indexes.

Analysis: Michelle Fleury, business reporter, New York

The US dollar is flexing its muscles and causing considerable anxiety among investors.

The prospect of a rate rise sooner rather than later in the world's largest economy is a big factor behind the currency's new found strength.

For the past few years, money has been flowing outside of the US and into riskier assets in search of higher returns. Now all that cash is coming back to American shores as the economy continues to power ahead.

But the pace of the dollar's rise is making some on Wall Street nervous. Will the US economy be able to cope? Corporate earnings in particular are vulnerable.

And if America is strong enough to withstand a stronger dollar, what will it do to the rest of the world?

In London, the FTSE 100 recorded the biggest one-day fall of the year, closing 2.5% lower at 6,702, while Paris' Cac-40 and Frankfurt's Dax also ended the day in negative territory.

One bright spot in the US corporate landscape was clothing retailer Urban Outfitters. Shares in the firm rose by almost 12% after it reported better-than-expected fourth quarter results on Monday.

The retailer - which appeals mostly to younger shoppers - said same-store sales rose by 6% compared to a year earlier, and net income was $80m for the three month period ending 31 January 2015.