Markets had been cheered by limited gains for nationalists in the EU elections, though wins for eurosceptic parties in Italy, France, Poland and would-be ex-member Britain, as well as snap elections in Greece and political turmoil in Austria, curbed risk appetite.

Italy's dispute with the European Commission, however, emerged to dominate European trading as markets opened. The commission could fine Italy 3 billion euros for accumulating debt and deficits that break EU rules, Italian Deputy Prime Minister Matteo Salvini said on Tuesday.

"It reopens the whole agenda of whether Salvini wants to be part of the euro or not," said Colin Harte, portfolio manager and strategist at BNP Paribas Asset Management.

"The danger is that the (dispute between Salvini and the EU) turns out to be more aggressive on both sides, then you will see people switch out of positions," Harte said.

In the United States, the Dow Jones Industrial Average fell 237.92 points, or 0.93%, to 25,347.77, the S&P 500 lost 23.67 points, or 0.84%, to 2,802.39 and the Nasdaq Composite dropped 29.66 points, or 0.39%, to 7,607.35.

The pan-European STOXX 600 index lost 0.22% and MSCI's gauge of stocks across the globe shed 0.53%.

High-grade euro zone bond yields were lower across the board in a risk-off environment, with the ousting of Austrian Chancellor Sebastian Kurz adding to nervousness.

U.S. yields were also lower. Benchmark 10-year Treasury notes yielded 2.26%, down six basis points. The U.S. Treasury Department sold five-year government notes on Tuesday at a yield of 2.065%, the lowest yield for 5-year Treasuries since October 2017.

Trade worries remained high. U.S. President Donald Trump said on Monday that Washington was not ready to make a deal with China, but that he expected one in the future. At the same time, he pressed Japanese Prime Minister Shinzo Abe to reduce Japan's trade imbalance with the United States.

Hope for a U.S.-China trade agreement still underpins optimism in global markets.

"Markets are holding their nerve and will start to attach great hope to the meeting between Presidents Xi and Trump in June," said BNP Paribas' Harte. "But I'm not as convinced that Trump wants a deal."

"The big risk is that the U.S. starts being disruptive to supply chains ... and the big problem is we don't really understand how much damage this will do," Harte said.

Auto stocks rose globally after Fiat Chrysler confirmed it had proposed a merger with Renault, a deal that would create the world's third-biggest carmaker. The rally spilled into Asia with Mitsubishi Motors Corp 7211.T in Japan adding 5.95% and Nissan Motor Co 7201.T gaining 2.31%.

The dollar index, which tracks the U.S. currency against a basket of six other major currencies, rose 0.17% to 97.782.

In commodity markets, oil prices extended gains after rising more than 1% on Monday. Prices rose on tensions in the Middle East and continuing Russian supply disruptions after a contamination problem discovered last month.

Brent crude was 0.31% higher at $70.33 per barrel, having earlier dipped below the $70 mark. U.S. West Texas Intermediate crude gained 1.16% to $59.31 per barrel.

(Reporting by David Randall; Editing by Dan Grebler, Tom Brown and Susan Thomas)

By David Randall