Wall Street stocks closed sharply lower on Thursday on a fresh wave of tariff threats by US President Donald Trump, and despite producer inflation remaining flat.

At the close of trading, the Dow Jones Industrial Average dropped 1.3 percent to 40,813, while the broad-based S&P 500 Index fell 1.4 percent to 5,521.

The tech-heavy Nasdaq Composite Index lost nearly two percent to 17,303.

The S&P drop means the index has tumbled into a correction, or down 10 percent from its highest point of the year, recorded just last month.

Before trading began, Trump unleashed the threat of a 200 percent tariff on wine, champagne and other alcoholic beverages from the European Union.

His threat came after the EU announced a series of countermeasures against new US steel and aluminum tariffs, including a sharp hike targeting US whiskey.

Trump said he would make good on his threat if the bloc's planned whiskey levy "is not removed immediately."

On Thursday, government data also showed that the producer price index was flat in February, after a 0.6 percent rise in January.

"That's pretty good news in terms of inflation but the problem is, you have a trade war that's expanding," said Peter Cardillo of Spartan Capital Securities.

While recent inflation reports have been encouraging, Cardillo added that markets are wary as the full effects of Trump's tariffs have yet to be seen.

Looking ahead, investors will be eyeing the Federal Reserve's policy meeting next week, alongside Fed Chair Jerome Powell's comments on the economy. (AFP)