The Dow industrials closed at a more than six-year low on Thursday as investor fears that banks could be nationalised drove their stocks to a 17-year low.
A rise in the number of people receiving jobless benefits to a record high also stoked worries among Wall Street investors about the deepening recession.
The Nasdaq fared the worst of the three major indexes after a disappointing outlook from Hewlett-Packard Co sent its stock down almost 8% and dragged down other technology shares.
Hewlett-Packard, the world's largest PC maker, which warned its expects weak market conditions to persist, was also the Dow's biggest negative weight.
Shares of major banks tumbled on concerns about government plans to mop up bad assets from their books. The KBW banks index fell to its lowest level since 1992, led by a 14% slide in Bank of America shares.
Economic bellwether General Electric, whose operations include a big financial unit, tumbled more than 4% and briefly traded below $US10 for the first time since 1995, adjusted for stock splits.
The Dow Jones industrial average lost 89.68 points, or 1.19%, to close at 7,465.95, after setting an intraday bear market low of 7,447.55.
The Standard & Poor's 500 Index gave up 9.48 points, or 1.20%, to 778.94. The Nasdaq Composite Index was down 25.15 points, or 1.71%, at 1,442.82
Since the start of the year, the Dow has fallen nearly 15%.