(Reuters) - U.S. stocks dropped more than 1 percent on Tuesday as rising tensions on the Korean peninsula added to worries over how euro zone debt woes could affect domestic markets.

North Korea fired scores of artillery shells at a South Korean island, killing two soldiers and setting houses ablaze, and South Korea returned fire. The iShares MSCI South Korea Index Fund (EWY.P) fell 5.3 percent.

Global stock markets tumbled while the dollar climbed as the geopolitical tensions and worries over Ireland's debt problems drove investors to the relative safety of the U.S. currency. Crude oil futures sank 1.4 percent.

"The prospect of armed conflict in Asia along with the debt problems on Europe are creating a lot of negative sentiment," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

The Dow Jones industrial average .DJI dropped 138.88 points, or 1.24 percent, at 11,039.70. The Standard & Poor's 500 Index .SPX was down 15.94 points, or 1.33 percent, at 1,181.90. The Nasdaq Composite Index.IXIC slid 32.63 points, or 1.29 percent, at 2,499.39.

In the latest economic data, the U.S. economy grew faster than previously estimated in the third quarter, but still not enough to address stubbornly high unemployment. Also, existing home sales fell by more than forecast in October after two months of gains.

"The GDP data shows that the economy is certainly still growling, but the numbers weren't big enough to disrupt the market's focus on overseas events." McCain said.

On the upside, Dow component Hewlett-Packard Co (HPQ.N) rose 1.2 percent to $43.75 a day after it raised its outlook and posted stronger-than-expected quarterly profit.

The European Union urged Ireland to adopt an austerity budget on time to unlock promised EU/IMF funding, while Irish Prime Minister Brian Cowen rebuffed calls for a snap election and insisted the budget would go ahead as planned on December 7.

European stocks fell nearly 1 percent to a 3-week low, led by declining banking shares. U.S.-listed shares of Bank of Ireland (IRE.N) sank 23 percent to $1.71, while HSBC Holding (HBC.N) fell 1.8 percent to $51.36.

Among South Korean companies, steelmaker Posco (PKX.N) sank 4.5 percent to $96.52.

Hormel Foods Corp (HRL.N) rose 3.4 percent to $49.54 after it reported higher-than-expected profit, while Campbell Soup Co (CPB.N) lost 0.7 percent to $34.57 after its earnings missed expectations.

Minutes of the Federal Reserve's November 3 Open Market Committee meeting that included its decision for more quantitative easing will be released at 2 p.m. EST (1900 GMT).

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