The selloff, which put the S&P 500 at its lowest since August 7, followed weak data from Germany, Europe's largest economy, and comments from a Fed official who suggested investors had unrealistic expectations about the Fed's eventual rate increase.
German exports in August showed their biggest drop since January 2009, which followed reports this week showing steep drops in industrial orders and output.
"Investors are focused on the uncertainty about the economy," said Michael Yoshikami, CEO and founder at Destination Wealth Management in Walnut Creek, California.
Adding to market jitters, St. Louis Federal Reserve Bank President James Bullard said he was concerned by a disconnect between the market's view of the Fed's rate hike path and the central bank's own view.
"The markets are making a mistake," said Bullard, a non-voting member of the FOMC who is, however, seen by investors as a bellwether among Fed officials.
Expectations for a more dovish Fed had triggered a rally in stocks on Wednesday, but indexes wiped out all of those gains in Thursday's trading.
Market participants said the end of the Fed's third round of quantitative easing this month was also bearish as it takes away one of the pillars of the five-year bull market.
"QE3 ending is one positive catalyst taken away, a tailwind turning into a headwind," said Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.
"Tighter policy is the path we're on and we should be," he said.
The Dow Jones industrial average ended down 334.97 points, or 1.97 percent, to 16,659.25, the S&P 500 lost 40.68 points, or 2.07 percent, to 1,928.21 and the Nasdaq Composite dropped 90.26 points, or 2.02 percent, to 4,378.34.
The Russell 2000 index of small-cap stocks fell 29.13 points, or 2.66 percent, to close at 1,067.99.
Energy shares were by far the weakest on the day, dropping 3.7 percent in their biggest one-day decline since April 2013. U.S. crude oil prices settled at their lowest since December 2012 and continued to fall in post-settlement trading.
The S&P 500 posted back-to-back intraday moves of more than 40 points for the first time in three years. The CBOE Volatility Index jumped more than 24 percent to close at its highest level since early February.
The largest percentage gainer on the S&P 500 was Ventas Inc, which rose 1.3 percent, while the largest percentage decliner was Gap Inc, down 12.5 percent.
On the Nasdaq 100 the largest percentage gainer was Apple Inc, up just 0.2 percent, while the largest percentage decliner was VimpelCom Ltd, down 5.9 percent.
Among the most active on the NYSE were Bank of America, down 3.10 percent to $16.59; Petrobras, up 1.57 percent to $16.77; and AMD, down 10.06 percent to $2.95.
GT Advanced Technologies, up 17.3 percent to $1.29, and Apple were among the most actively traded on the Nasdaq.
Declining issues outnumbered advancing ones on the NYSE by 2,726 to 364, for a 7.49-to-1 ratio on the downside; on the Nasdaq, 2,314 issues were falling and 387 advancing for a 5.98-to-1 ratio favoring decliners.
The benchmark S&P 500 index showed 22 new 52-week highs and 19 new lows; the Nasdaq Composite recorded 24 new highs and 215 new lows.
Volume soared to more than 8.2 billion shares on U.S. exchanges, above the average in the past five days of 7.27 billion, according to BATS Global Markets data.
(Reporting by Rodrigo Campos; Editing by Nick Zieminski)
