With crude hitting a new high at $142.26 a barrel earlier on, the market remained worried about the impact of surging commodities prices on consumers
A survey by the University of Michigan revealed consumer confidence slid further in June.
"With oil prices bursting through the $140 threshold and seemingly unstoppable, economists are busily debating whether it's all going to end in fire (inflation) or ice (deep recession)," said Doug Porter, senior economist at BMO Capital Markets.
"Equity markets aren't so concerned about the fineries of the debate, but are instead much more focused on the 'it's all going to end' portion of the discussion," he wrote in a note.
After closing Thursday at its lowest level since September 2006, the Dow Jones Industrial Average [ fell another 117 points, or 1%, to 11,331.
Of the Dow's 30 components, 24 fell, with investors again selling battered financial components American Express Co. , Citigroup Inc. , and J.P. Morgan Chase & Co.
American International Group Inc. fell 1.8%, after the insurance giant said it will absorb $5 billion in losses from securities lending, Bloomberg News reported, citing an executive there.
The S&P 500 Index fell 8 points to 1,275, while the Nasdaq Composite Index dipped 23 points to 2,297.
Tech shares fell further, with Palm Inc. losing 9% as the handset maker reported a worse-than-forecast 26% sales fall and didn't offer an outlook.
Sony Ericsson, the mobile-phone venture of Sony Corp. and Ericsson , warned of slowing demand for mid- to high-level phones. Ericsson shares fell 6.4%.
Trading volumes showed 712 million shares exchanging hands on the New York Stock Exchange, and 498 million trading on the Nasdaq stock market. Decliners topped gainers by 2 to 1 on both exchanges.
In economic news, May core inflation, which excludes food and energy, came in lower than forecast, reducing speculation that the Federal Reserve will have reason to raise interest rates this year.
But this along with another dip in consumer confidence in June, pressured the dollar and helped boost crude futures further.
Stocks were crushed on Thursday after tepid earnings outlooks from technology bellwethers Oracle Corp. and Research In Motion Ltd. ; negative notes from Goldman Sachs on brokers and General Motors Corp. ; and oil prices reaching $140 a barrel.
The Dow plunged 358 points, the S&P 500 lost 38 points and the tech-heavy Nasdaq slumped 79 points.
"We're getting to the stage now where rising oil prices are really starting to bite," said Richard Batty, director of strategy at Standard Life Investments. "They're causing a crimping in terms of retail spending and consumer confidence."
The drop in stock markets over the last couple of sessions is justified, according to Batty, given the rise in oil and the fact that investors are reassessing the earnings outlook of those companies that haven't been negatively impacted so far.
In other news, KB Home fell over 4% after joining fellow homebuilder Lennar Corp. in reporting a quarterly loss.
As expected, Anheuser-Busch Cos. formally rejected InBev's $46 billion, takeover offer, worth $65 a share.
By Nick Godt