All three major US stock indexes were down more than 1 percent, with S&P 500 on track for its worst day since Sept. 13. The dollar index has erased its post-election gains.
Disappointing US economic data also weighed on markets.
Reports that Trump asked then-FBI Director James Comey to end a probe into his former national security adviser have raised questions over whether obstruction of justice charges could be laid against the president.
The news comes on the heels of a tumultuous week at the White House when Trump unexpectedly fired Comey. He also reportedly disclosed classified information to Russia's foreign minister about a planned Islamic State operation.
"I think the biggest issue right now is what does this mean for the plan that we thought we were on," said Jeremy Bryan, portfolio manager at Gradient Investments in Arden Hills, Minnesota. "Is it delayed or is it dead?"
The dollar index, which tracks the US currency against six peers and had scaled a 14-year peak of 103.82 on Jan. 3, fell 0.4 percent to its lowest level since Nov. 9, surrendering all of its "Trump bump" gains.
The Dow Jones Industrial Average was down 278.59 points, or 1.33 percent, to 20,701.16, the S&P 500 had lost 31.89 points, or 1.33 percent, to 2,368.78 and the Nasdaq Composite had dropped 114.93 points, or 1.86 percent, to 6,054.94. "The equity markets have ignored the noise out of Washington. However, we think the situation is likely to change as this crisis leads to an interruption of the pro-growth White House agenda, deflating the Hope Rally," Peter Cardillo, chief market economist at First Standard Financial, wrote.
Bank stocks, which outperformed in the post-election rally, were the worst hit. The S&P 500 financial sector tumbled more than 2 percent, led by losses in Bank of America and JPMorgan.
At nearly 18 times forward earnings, the S&P 500 trades at a significant premium to its long-term average valuations of 15 times, according to Thomson Reuters data.
MSCI's gauge of stocks across the globe fell 0.9 percent.
Upbeat growth data and optimism over pro-growth policies under Trump helped boost US stocks since the Nov. 8 US election.
Recent US data, which includes softer-than-expected retail sales and inflation, has raised concern about the strength of consumer sentiment.
US Treasury yields fell to three-week lows, with benchmark 10-year notes up 20/32 in price to yield 2.26 percent, the lowest level since April 25 and down from 2.33 percent late on Tuesday.
In commodity markets, safe-haven gold hit a two-week high, while oil prices were higher. Spot gold rose for a fifth day and was up 1.8 percent at $1,258.38 an ounce.