NEW YORK, Dec 1 (Reuters) - U.S. stocks, the dollar and Treasury yields sank on Friday after an ABC report said former national security advisor Michael Flynn was prepared to testify that Donald Trump instructed him to make contact with Russians during the presidential campaign.
The moves in U.S. financial markets reverberated across assets in Europe and emerging markets. Government bond yields and stocks in the euro area tumbled following the news.
Reuters has not verified the ABC News report, which cited a Flynn confidant.
"The market hasn't priced in a former national security advisor testifying against the President," said Michael Antonelli, managing director, institutional sales trading at Robert W. Baird in Milwaukee.
"It potentially jeopardizes tax reform and the agenda of the administration," he said, adding that "it puts all the market-friendly forces like tax reform and economic growth on the back burner."
Flynn was also charged with lying to the FBI, marking an escalation of an investigation into alleged ties to Russia that has cast a cloud over Trump’s administration.
Financial markets reacted to the possibility of Trump's agenda stalling further even as his first major legislative win, a tax overhaul, seemed to be within grasp. His campaign promise of corporate tax cuts has been essential to the stock market's rally since Election Day last November.
If the Russia probe derails the tax legislation, it could hurt the chances of Republicans retaining their majorities in the House and Senate as voters go to the polls next year.
The declines in stocks, however, could be brief as the U.S. Senate appears to near passage of a tax overhaul bill seen by analysts as a boon to shares on Wall Street.
The Dow Jones Industrial Average fell 122.42 points, or 0.5 percent, to 24,149.93, the S&P 500 lost 17.89 points, or 0.68 percent, to 2,629.69 and the Nasdaq Composite dropped 71.18 points, or 1.04 percent, to 6,802.79.
The pan-European FTSEurofirst 300 index lost 0.74 percent and MSCI's gauge of stocks across the globe shed 0.49 percent.
Emerging market stocks lost 0.42 percent. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.05 percent lower, while Japan's Nikkei rose 0.41 percent.
The dollar index fell 0.29 percent, with the euro up 0.06 percent to $1.1909.
"To the extent that this (Flynn) headline further ensnares this administration into this investigation or suggests a widening of the Special Counsel’s probe I think that it is certainly a key concern for global investors and that’s why we are seeing the dollar come off," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
The Japanese yen strengthened 0.51 percent versus the greenback at 111.98 per dollar, while Sterling was last trading at $1.3497, down 0.21 percent on the day.
Benchmark 10-year notes last rose 18/32 in price to yield 2.3526 percent, from 2.415 percent late on Thursday.
The 30-year bond last rose 49/32 in price to yield 2.7546 percent, from 2.831 percent late on Thursday.
Crude futures rose a day after OPEC and other major producers agreed to continue reining in output until the end of 2018 to try to reduce a global oil glut and boost prices.
U.S. crude rose 1.81 percent to $58.44 per barrel and Brent was at $63.78, up 1.84 percent on the day.
Spot gold added 0.7 percent to $1,283.51 an ounce. U.S. gold futures gained 0.66 percent to $1,281.60 an ounce.
Copper rose 0.88 percent to $6,821.50 a tonne.
Reporting by Rodrigo Campos; Additional reporting by Saqib Iqbal Ahmed, Sinead Carew, Scott DiSavino, Chuck Mikolajczak, Caroline Valetkevitch and Lewis Krauskopf; Editing by Bernadette Baum