The benchmark Bovespa index .BVSP moved down 1.01 percent to 67,818.94 in early trade, a day after advancing on signs of industrial expansion.
Brazil's currency, the real (BRBY), weakened 1.3 percent to 1.751 per the dollar. The greenback, considered a safe-haven currency in times of turmoil, strengthened against a basket of major currencies .DXY.
Risk aversion without a doubt is the key today, said Steven Butler, head of FX trading at Scotia Capital in Toronto. Markets are very jittery.
The caution was due in part to Dubai, where Moody's Investors Service downgraded six Dubai-linked issuers on Tuesday after concluding the government would provide no meaningful support for top firms like DP World DPW.DI or Emaar Properties EMAR.DU. For more see [ID:nGEE5B71LE]
Dubai roiled economic markets late last month when news of a possible debt default at a Dubai state-owned conglomerate sparked fears of renewed global financial turmoil.
In addition, the Bovespa index has been range-bound for the past few sessions, noted Adriano Fontes, a fund manager with Oren Investimentos.
The downward movement on Tuesday could also mean continued profit-taking that saw the Bovespa index give up 1.04 percent last Friday, he said.
The stronger dollar pressured commodities. The 19-commodity Reuters-Jefferies index .CRB shed 0.57 percent.
The Bovespa index includes a number of stocks tied to the trade in raw materials, including heavyweights Petrobras and Vale, which led losers on Tuesday.
State-controlled energy giant Petrobras (PETR4.SA) fell 0.81 percent to 38.09 reais, as crude oil CLc1 dropped 1.2 percent on the back of the stronger dollar and concerns about a slow recovery in energy demand.
Mining company Vale (VALE5.SA), the world's largest iron ore producer, declined nearly 1 percent to 41.17 reais.
Brazilian banks also sank. Itau Unibanco (ITUB4.SA), Brazil's largest private-sector bank by assets, shed 0.87 percent to 39.70 reais, Banco do Brasil (BBAS3.SA), Latin America's biggest bank by assets, moved down 1.29 percent to 30.70 reais, and Bradesco (BBDC4.SA) shed 1.08 percent to 37.58 reais.
Yields on Brazilian interest rate futures contracts <0#DIJ:> ticked broadly higher.
The yield on the contract due January 2011 DIJF1 edged up to 10.42 percent from 10.38 percent. The yield on the contract due July 2010 DIJN0 inched up to 9.21 percent from 9.18 percent.
Both were among the morning's most actively traded contracts.
Investors use the contracts to bet on the country's benchmark interest rate, the Selic, currently at a record low 8.75 percent.
Central bank policymakers meet this week to consider changes to the rate. A decision is expected after the close of markets on Wednesday. Analysts expect the Selic to remain stable through year-end. [ID:nSPG002622]
However, a quickened pace in Brazil's economic recovery next year could result in inflationary pressures and prompt the central bank to hike rates.
(Reporting by Luciana Lopez; editing by Jeffrey Benkoe)