The meltdown came as U.S. lawmakers prepared to vote on a $700 billion financial rescue plan that some are already saying won't be enough to prevent a full-scale financial crisis in many major countries.
"The Fed and other central banks are responding to the freezing up of liquidity around the world. The actions, however, don't seem to be ameliorating any of those fears yet. Indeed, equities are plunging further," said analysts at Action Economics.
The Dow Jones Industrial Average fell 271.76 points, or 2.5%, to 10,871.37, with 25 of its 30 components posting declines, led by Alcoa Inc. , down 6.3%, and American Express Co. , off 6.7%.
Citigroup Inc. gained the most of among the blue chips, rising 1.7%.
The Federal Deposit Insurance Corp. earlier said Citigroup would buy the banking operations of struggling Wachovia Corp. . Another banking giant, Washington Mutual Inc. , recently succumbed to the credit turmoil.
The S&P 500 dropped 45.83 points, or 3.8%, to 1,167.18, with energy, financials and materials fronting sector losses that spread across all 10 of the index's industry groups.
The Nasdaq Composite was hit the hardest, plunging 102.52 points, or 4.7%, to 2,080.82, with losses in the tech sector led by Apple Inc. , off nearly 14.2%, after two brokers cut their ratings on its stock. .
The downturn had shares of Google Inc. falling to a two-year low under $400 a share, recently off 8% at $396.43.
Volume on the New York Stock Exchange neared 585 million, with decliners ousting advancers nearly 10 to 1. On the Nasdaq, 455 shares exchanged hands, and decliners ran past advancing stocks more than 4 to 1.
Taking unprecedented steps, the Fed and other major central banks on Monday poured hundreds of billions of dollars of added liquidity into money markets left paralyzed by fears of further bank failures in the United States and Europe. .
Ahead of Wall Street's start, President Bush urged passage of the government's $700 billion financial-rescue package, which is awaiting final approval from Congress. .
The deal, reached during marathon weekend talks, calls for $250 billion upfront to be given to the Treasury to buy troubled assets. The bad debt purchases could be made through an auction process or through directly purchases, a Treasury official said in a conference call.
Equity strategists at Credit Suisse say $700 billion represents about 12% of mortgages not backed by Freddie Mac or Fannie Mae -- "probably an appropriate amount to ensure markets become more liquid." But they said it was too small, especially compared to the original Resolution Trust Corp. program that rescued savings-and-loans in the late 1980s.
Shares of Cleveland-based bank National City Corp. fell 42.9% amid fears the company could become the next victim of the credit crisis.
Mortgage giant Freddie Mac , taken over by the government, on Monday said it had been subpoenaed by federal prosecutors.
In Europe, financial institutions were also ailing, with the governments of Belgium, the Netherlands and Luxembourg launching a $16.4 billion rescue of Fortis, the Belgian-Dutch bank.
The U.K. government said it is nationalizing Bradford & Bingley after investors and lenders lost confidence in the mortgage lender, with its stock market listing canceled shortly before the markets opened.
And, the Icelandic government said it bought a 75% stake in Glitnir hf, the country's third-largest lender, while a consortium of German financial institutions bailed out real estate firm Hypo Real Estate.
Credit markets remained under pressure, with the yield on the 3-month Treasury bill -- viewed as the least risky short-term investment, falling to 0.42% from 0.87% late Friday. The yield on the 10-year Treasury note declined to 3.71%. .
The dollar rallied against the euro and the British pound, while gold gained and oil futures fell.
The FTSE 100 tumbled 5.3% in London and the Nikkei 225 dropped 1.3%. .
Emerging equity markets in Asia, Europe, Latin America and Africa also posted steep losses. .
By Kate Gibson