The selloff was broad-based, but financial, energy and materials sectors were hit hardest as investors dumped stocks considered more risky.
Worries over ability of Greece, Portugal and Spain to pay their debts buoyed the U.S. dollar, which hurt commodity prices denominated in the greenback.
We can't see the kind of confidence we saw a few weeks ago in the market any more. People are looking for more reasons to sell, and they are no longer shaking off the bad news or buying on the dips, said Richard Sparks, senior equities analyst at Schaeffer's Investment Research in Cincinnati, Ohio.
The Dow Jones industrial average <.DJI> was down 215.39 points, or 2.10 percent, at 10,055.16. The Standard & Poor's 500 Index <.SPX> sank 27.43 points, or 2.50 percent, at 1,069.85. The Nasdaq Composite Index <.IXIC> dipped 54.83 points, or 2.50 percent, at 2,136.08.
Spain and Portugal were the latest euro zone countries to worry investors about mounting fiscal deficits after Greece had rattled markets earlier.
An unexpected increase in U.S. weekly initial claims for state unemployment benefits pointed to weakness in the labor market. Employment has been lagging the broader economic recovery.
The CBOE Volatility Index <.VIX>, Wall Street's favorite measure of sentiment, spiked 18.43 percent to 25.57, reflecting investor anxiety.
Aluminum company Alcoa Inc was among the Dow's biggest percentage decliners, down 4 percent at $12.94, along with Bank of America , down 4.2 percent at $14.89. The largest U.S. bank 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 tumbled 8.4 percent to $226.75 after it posted quarterly earnings that fell short of Wall Street's estimates. That contrasted with stronger-than-expected earnings from rival Visa Inc late Wednesday. Visa's shares edged up 0.1 percent to $83.63.
Cisco Systems Inc shares rose 0.7 percent to $23.24, the only advancer on the Dow, after the network equipment maker reported higher-than-expected revenue growth late on Wednesday.
Shares of CME Group Inc , which operates U.S. financial exchanges, dipped 8.9 percent to $266.30 after the company posted fourth-quarter profit below Wall Street expectations.
An S&P index of financial stocks <.GSPF> was down 3.1 percent.
Chevron shares dipped 2.4 percent to $71.49 and Exxon Mobil fell 2 percent to $62.26, weighed by crude oil prices that slipped nearly 5 percent to $73.15 a barrel.
But retailers reported January sales that beat Wall Street's estimates. Department store operator Macy's Inc and teen retailer American Eagle Outfitters Inc raised earnings forecasts.
Macy's rose 3.7 percent to $16.84, while American Eagle fell 2.3 percent to $16.06. But Target Corp , the No. 2 U.S. discount retailer, posted disappointing sales, sending its shares down 3.2 percent to $49. An S&P retail index <.RLX> dropped 1.6 percent.
The specter of rising unemployment before Friday's non-farm payrolls report overshadowed stronger-than-expected factory orders as investors piled into safer assets. U.S. Treasury debt prices rallied.
(Reporting by Angela Moon, Editing by Kenneth Barry)