Stocks ended their worst quarter since the depths of the 2008 credit crisis, crippled by Europe's debt debacle, a U.S. credit downgrade and a sputtering global economy.
A steep slide on Friday closed out a fifth month of losses as weak economic data from China sparked fears of a global economic slowdown while investment bank Morgan Stanley plummeted on concerns about its exposure to European banks.
The S&P 500 index has lost more than 14 percent this quarter and over 7 percent in September alone. As of Thursday, Wall Street's deep downturn in the third quarter wiped out $2.2 trillion of the Wiltshire 5000 index -- the broadest measure of U.S. stocks.
Why is the market so soft and so weak? Because '08 is still fresh in people's memories, said Joseph Mazzella, a senior trader at Knight Capital in Jersey City, New Jersey.
Stocks have been battered by the threat of a slowdown and fears that a Greek debt default could spark a credit shock similar to that caused by Lehman Brothers in September 2008, sending markets into a tailspin.
Fears of a hard landing in the world's second largest economy joined the potent mix troubling investors after China's manufacturing sector shrank for the third month in a row.
HSBC's China flash purchasing managers index showed the longest contractional streak since 2009 in a worrying sign for the world economy, which has looked to China as a rare source of expansion.
The economic engine that has been driving growth has been China and if that comes undone, it gets scary again, said Mazzella.
Investors will be eyeing China's official PMI, due out on Saturday, which may have edged up again in September. Any disappointment there will be a blow for markets.
Financial shares stumbled with Morgan Stanley, which fell 10.5 percent to $13.51 as investors appeared to react to fear signals in credit markets.
The cost of insuring Morgan Stanley's five-year bonds spiked in recent days to almost three times what it was on June 30. It shares have erased all their gains of the last three year.
The Dow Jones industrial average dropped 240.60 points, or 2.16 percent, to 10,913.38. The Standard & Poor's 500 Index fell 28.98 points, or 2.50 percent, to 1,131.42. The Nasdaq Composite Index lost 65.36 points, or 2.63 percent, to 2,415.40.
Wall Street's fear gauge, the CBOE volatility index, or VIX, rose more than 10 percent to 42.96, its highest close since mid-August and indicating investors expect more volatility ahead.
There is a lot of fear that GDP growth is going to slow down, or it's not going to be as fast as consensus estimates assume, said Adam Krejcik, an analyst at Roth Capital in Newport Beach, California. Generally speaking there is a lot of fear out there, just a crisis of confidence.
Through Thursday, the MSCI All Country World Index had lost about $4.7 trillion in market capitalization. The U.S. benchmark S&P 500 has lost about $1.7 trillion in market cap during the quarter.
Euro zone annual consumer prices unexpectedly rose in September 3.0 percent and followed surprisingly higher inflation in Germany.
In what may be a precursor to the quarterly earnings season, Ingersoll Rand Plc tumbled 12.1 percent to $28.09 after the industrial conglomerate cut its third-quarter and full-year earnings forecast to below market estimates. The Morgan Stanley cyclical index dropped 3.6 percent.
Markets showed little reaction two U.S. economic reports that were stronger than analysts expected.
Business activity in the U.S. Midwest grew more than expected in September, buoyed by new orders and a jump in employment.
The Institute for Supply Management-Chicago business barometer surprisingly rose in September more than economists had forecast.
U.S. consumer sentiment improved in late September but worries persisted about jobs and finances, which could curb household spending in the coming months, the Thomson Reuters/University of Michigan final September reading of the overall index on consumer sentiment showed.
About four stocks fell for every one that rose on the New York Stock Exchange. On the Nasdaq, about 7 stocks fell for every two that rose.
About 8.58 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above this year's daily average of 7.96 billion.
(Additional reporting by Himank Sharma; Editing by Kenneth Barry)