Treasury yields also rose after Fed Governor Lael Brainard said late Wednesday that an improving global economy and a solid U.S. recovery meant it would be "appropriate soon" to raise rates - the latest of several Fed officials making hawkish statements this week.
Fed Chair Janet Yellen is set to speak on the economic outlook in Chicago on Friday in her last speech before the Fed's March 14-15 meeting.
Federal funds futures prices suggest markets now see a 77.5 percent chance of a 25-basis-point rate hike in March, up from 66 percent on Wednesday and 35 percent on Tuesday, according to CME Group's FedWatch tool.
The prospect of higher rates pushed equities down on Thursday, compounding the pressure after Wednesday's rally, in which all three major indexes hit records.
"It was an awfully strong rally yesterday without necessarily a lot of real news to justify it, so I think you're just getting some profit taking today," said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey.
The stock market is "overdue for a correction" because valuations are so high, said Robert Phipps, a director at Per Stirling Capital Management in Austin.
The Dow Jones Industrial Average <.DJI> fell 112.58 points, or 0.53 percent, to 21,002.97, the S&P 500 <.SPX> lost 14.04 points, or 0.59 percent, to 2,381.92 and the Nasdaq Composite <.IXIC> dropped 42.81 points, or 0.73 percent, to 5,861.22.
MSCI's global stocks index <.MIWD00000PUS> was down 0.5 percent after touching an intraday record high.
The dollar index <.DXY>, which measures the greenback against a basket of six major currencies, was last up about 0.4 percent at seven-week highs, helped by data as well as rate hike bets. The number of Americans filing for unemployment benefits fell to a nearly 44-year low last week, pointing to further tightening of the labor market.
The greenback was last up 0.6 percent against the Japanese yen <JPY=>, the highest since Feb. 15, while the euro fell 0.4 percent to $1.0507 <EUR=>.
"It's entirely Fed-focused at the moment," said Craig Erlam, senior market analyst at Oanda in London.
In fixed income markets, U.S. Treasury yields pushed higher on the prospect of higher rates. U.S. 2-year <US2YT=RR> yields hit their highest since August 2009, at 1.34 percent, while the 3-year <US3YT=RR> yield hit a nearly 11-week high of 1.617 percent. The 10-year note <US10YT=RR> yield hit a more than two-week high of 2.505 percent.
Oil prices fell for a third consecutive day after a record build-up in U.S. crude inventories and data showing Russian oil production cuts have stalled. Brent crude <LCOc1> ended the session down 2.3 percent at $55.08 a barrel while U.S. crude <CLc1> settled down 2.3 percent at $52.61.
The dollar put metals prices under pressure. Copper <CMCU3> fell 1.4 percent to $5,929.85 a tonne while gold <XAU=> fell 1 percent to $1,234.71 an ounce.
"The previous two occasions ahead of a Fed hike, we've seen gold weaken only to rally in the aftermath and that could potentially be seen once again," said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.
(Reporting By Sinead Carew; Editing by Nick Zieminski)
By Sinead Carew