The Dow Jones Industrial Average plunged 4.3 per cent overnight, its worst one-day drop since the financial crisis, as global markets melted down over fears of a new economic downturn.
The Dow closed down 512.76 points to 11,383.68. The broader S&P 500 lost 4.8 per cent to 1200.07, while the tech-heavy Nasdaq Composite plunged 5.1 per cent to 2556.39.
More turmoil over sovereign debt problems in Europe and feeble US economic data are stoking "fear that the economy is heading for a double-dip recession," said Peter Cardillo of Rockwell Global Capital.
"The market is pricing that in," he said.
The last time that the Dow fell as many points in a single day was in October 2008, during the nadir of the global financial crisis.
All three indices are now well below the level at which they began 2011.
"We're seeing the erosion and now the loss of confidence, confidence in the economy, confidence in the market, confidence in the policy makers. It's all showing up," said Hugh Johnson, of Hugh Johnson Advisors.
Markets worldwide were on edge over fiscal weakness in Italy and Spain and the eurozone's ability to contain more crisis, as the two countries' borrowing costs surged in recent days.
Meanwhile the US Labor Department reported that weekly claims for unemployment benefits remained at a high 400,000 last week, as business and government layoffs persisted while new job creation remained sluggish.
All of the Dow's 30 blue-chip stocks were hit by the sell-off, but losses were most pronounced in basic materials, energy and financial companies, as well as large industrial conglomerates.
Aluminum giant Alcoa was the Dow's hardest-hit stock, plunging 9.3 per cent for the day. Bank of America fell 7.4 per cent, while Caterpillar dropped 7.0 per cent. Aircraft manufacturer Boeing was down 6.3 per cent.
Kraft, which was up in early trading after it unveiled plans to split into two companies, one for its US grocery business and the other for its global snacks portfolio, was down 1.5 per cent.
Stock markets have shrugged off a largely positive series of company earnings reports.
GM was down 4.3 per cent for the day even after reporting that its quarterly profit surged 89 per cent to a better-than-expected $2.5 billion. The car maker would have trouble meeting its sales forecasts in the event of a downturn.
Bond prices rose as investors flocked to the refuge of US government debt, a traditional safe haven.
The yield on the 10-year Treasury dropped to 2.46 per cent from 2.60 per cent late Wednesday, while that on the 30-year bond fell to 3.72 per cent from 3.87 per cent.Bond prices and yields move in opposite directions.
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