The Dow briefly fell below the crucial 10,000 mark on Thursday as stocks suffered their worst losses in more than nine months.
Escalating sovereign debt problems in Europe and an unexpected rise in jobless claims put investors on the defensive just ahead of Friday's crucial payrolls report.
Investors dumped banks and commodity-related shares and Wall Street's fear gauge jumped more than 20 percent, fueling worries that the brief respite from the market's late January slide was over.
We got spoiled last year with the market going up almost non-stop after the March low, Bob Doll, global chief investment officer for equities at BlackRock, told Reuters.
The consolidation or corrective phase is probably not over.
Worries over the ability of Greece, Portugal and Spain to pay their debts fueled a flight from stocks to the safe-haven U.S. dollar, which hurt commodity prices denominated in the greenback.
The unexpected increase in U.S. weekly initial claims for state unemployment benefits pointed to stubborn weakness in the labor market, and heightened concerns ahead of Friday's employment data.
The Dow Jones industrial average <.DJI> fell 268.37 points, or 2.61 percent, to close at 10,002.18. The Standard & Poor's 500 Index <.SPX> dropped 34.17 points, or 3.11 percent, to close at 1,063.11. The Nasdaq Composite Index <.IXIC> lost 65.48 points, or 2.99 percent, to close at 2,125.43.
The Dow is now off 6.7 percent from its 15-month closing high of January 19. The S&P 500 is off 7.6 percent from its 15-month closing high on the same date, while the Nasdaq is off 8.4 percent from its 16-month closing peak set on January 19.
Spain and Portugal were the latest euro-zone countries to worry investors about mounting fiscal deficits after Greece had rattled markets earlier.
Reflecting investor anxiety, the CBOE Volatility Index <.VIX>, Wall Street's favorite measure of sentiment, spiked 20.7 percent to end at 26.08.
Bank of America
The largest U.S. bank's stock was also pressured after New York's attorney general charged former Chief Executive Kenneth Lewis and former Chief Financial Officer Joe Price with fraud for allegedly misleading shareholders about the bank's acquisition of Merrill Lynch & Co.
Also weighing on the financial sector, credit card company MasterCard Inc
A rare bright spot came from Cisco Systems Inc
Shares of CME Group Inc
Total volume of 11.21 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, well above last year's estimated daily average of 9.65 billion.
Declining stocks outnumbered advancing ones on the NYSE by a ratio of 14 to 1, while on the Nasdaq, about seven stocks fell for every one that rose.
(Reporting by Angela Moon; Editing by Jan Paschal)