The Toronto Stock Exchange's S&P/TSX composite index ended down 262.88 points, or 1.2%, at 21,274.57, after posting on Monday its highest closing level since Nov. 25.
"We saw yields increase in the U.S. and the market is reacting to that," said Michael Sprung, president at Sprung Investment Management.
Benchmark U.S. Treasury yields jumped to two-year highs as traders prepared for the Federal Reserve to be more aggressive in tackling inflation.
"Inflationary concerns are becoming more and more of a drag on the market right now," Sprung said. "It is likely to affect the market I think for some time."
Wall Street's main indexes also declined as financial stocks were pressured by weak results and technology shares continued their sell-off to start the year.
Higher interest rates reduce the value to investors of the future cash flows that tech stocks tend to rely on to support lofty valuations.
Among stocks with the biggest declines on the TSX was software company Lightspeed Commerce Inc, which ended 8.1% lower.
The Toronto market's technology sector fell 3.3%, while heavily-weighted financial shares were down nearly 1% and industrials lost 2.2%.
Oil settled 1.9% higher at $85.43 a barrel as possible supply disruptions after attacks in the Middle East added to an already tight supply outlook.
Still, energy shares gave back some recent gains, falling 0.7%, and the materials group, which includes precious and base metals miners and fertilizer companies, lost 0.8%.
(Reporting by Fergal Smith; additional reporting by Amal S in Bengaluru; Editing by Chris Reese)
By Fergal Smith