Earnings that failed to meet expectations, including from United Parcel Service and Whirlpool, and further signs of deterioration in the euro zone hammered the mood on both sides of the Atlantic.
Shares of UPS were last down nearly 5 per cent, while those of Whirlpool were almost 8 per cent weaker. Quarterly results of both companies fell short of estimates and UPS also reduced its 2012 outlook.
"Economies around the world are showing signs of weakening and our customers are increasingly nervous," UPS Chief Executive Scott Davis said.
Apple is set to report quarterly results after the market close. The world's most valuable company may say earnings excluding some items grew 33 per cent to US$10.37 a share, according to the average of estimates compiled by Bloomberg. Sales are projected to rise 30 per cent to US$37.3 billion.
In late afternoon trading in New York, the Dow Jones Industrial Average slumped 1.52 per cent, the Standard & Poor's 500 Index dropped 1.24 per cent, while the Nasdaq Composite Index declined 1.04 per cent.
"We are going through an adjustment period where there has been a lot of talk about Europe facing a recession in 2012, now we are actually seeing it in the earnings and the market is reacting to that," Gail Dudack, chief investment strategist at Dudack Research Group in New York, told Reuters.
Europe's Stoxx 600 Index ended the day with a 0.5 per cent slide on the previous close.
Moody's Investors Service yesterday slashed its outlook on the Aaa-ratings for Germany, the Netherlands and Luxembourg, citing the level of uncertainty about the outlook for the euro zone because of the "increased likelihood of Greece's exit from the euro area."
Also, "there is an increasing likelihood that greater collective support for other euro area sovereigns, most notably Spain and Italy, will be required," Moody's said in a statement.
The euro slumped against the yen and the greenback, declining 0.8 per cent to 94.24 yen and shedding 0.5 per cent to US$1.2054. Earlier in the day it fell as low as 94.12 yen, the weakest since November 2000.
"The Moody's warning is significant," Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London, told Bloomberg News. "Investors are becoming increasingly concerned about their ability to access markets. There are lots of indications that the euro should be weaker."
Indeed, Greece is unlikely to be able to pay what it owes and further debt restructuring is likely to be necessary, Reuters reported, citing three European Union officials, a cost that would have to fall on the European Central Bank and euro zone governments.
Inspectors from the European Commission, the ECB and the IMF arrived in Athens today and will complete their debt-sustainability analysis next month but the conclusions were already becoming clear.
"Greece is hugely off track," one of the officials told Reuters, speaking on condition of anonymity because of the sensitivity of the issue. "The debt-sustainability analysis will be pretty terrible."
Meanwhile, fears are growing that Spain will be the next country to require a full-blown financial rescue. The yield on the nation's 10-year bond climbed as high as 7.636 per cent, the highest since November 1996, while the yield on the five-year note rose as high as 7.592 per cent.