In late afternoon trading, the Dow was down 400 points, or 3.4 percent to 11,079. The S&P 500 was down 51 points, or 4.2 percent, to 1,149. The Nasdaq was down 114 points, or 4.5 percent, to 2,417.
The Dow closed down 633 points at 10,811.
Stock markets in Asia began Monday's global rout. The main stock index fell almost 4 percent in South Korea and more than 2 percent in Japan. European markets opened later and fell, too, with Germany down 5 percent and France 4.7 percent.
S&P's warning for New Zealand
The credit rating agency said yesterday that there was no immediate impact on the sovereign ratings of Asia-Pacific countries from its downgrading of the United States.
"However, given the interconnectivity of the global markets, an unexpectedly sharp disruption in developed world financial markets could change the picture. It could lead the US and European economies into deep contractions again, or further delay their recoveries."
New Zealand is among those S&P says could experience export-driven slowdowns, either through weaker demand or lower export prices, or both.
In addition, countries whose financial systems rely heavily on overseas markets for funding, again including New Zealand, might find it more difficult to roll over debt.
The Government's balance sheet is among those S&P cites as "bearing the scars" of the recent downturn.
If a renewed slowdown came, it would be likely to have a deeper and more prolonged impact than the last one in 2008-09, it said.
"I'm a bit more optimistic than that," Prime Minister John Key said.
"In 2008-09 the whole banking system was extremely stressed. For the most part it is in much better shape now and there is no question corporate balance sheets are a lot stronger."
There was still room for monetary policy to ease and if commodity prices came off there could be some correction to the exchange rate, Key said.
Meanwhile President Barack Obama says the US always is and always has been a triple-A country, despite its rating agency debt downgrade.
He said also the US did not need a rating agency to tell it that its political system was having trouble functioning.
Speaking at the White House on the Standard & Poor's downgrade, Obama renewed a plea to Congress to take action in September of help create jobs and cushion Americans from a still weak economy.
Deutsche Bank chief economist Darren Gibbs said the risk of a double dip recession in the United States had clearly gone up.
US growth in the first half of the year was only 0.8 per cent, annualised, and the only reason the unemployment rate had dipped - to 9.1 per cent - on Friday was that the labour force participation rate had fallen to its lowest level since 1984.
The most recent consumer confidence survey, also on Friday, was at its lowest for 10 years - lower even than during the global financial crisis, Gibbs said. "The whole debacle around the renegotiation of the debt ceiling has clearly taken a toll," he said.
"A month ago American households could at least console themselves with gains in equity prices, even if house prices were flat or down. Now they don't even have that."
Goldman Sachs New Zealand economist Philip Borkin said his US colleagues now saw a one in three chance the United States would fall back into recession.
The fiscal stimulus put in place during the global financial crisis was winding down and fiscal policy would turn quite contractionary, he said.
"Despite the weaker dollar the US current account deficit is deteriorating and is expected to continue to do so. Unfortunately that means a higher New Zealand dollar and as a result we are becoming a lot more cautious about the manufacturing and tourism sectors as a result," Borkin said.
"It is not the environment we want for the export-led recovery."
Gibbs said that notwithstanding the S&P downgrade, the implications of the last week and a half were that US long-term interest rates would continue to decline.
"We know from Japan that you can have a lower sovereign rating and still have extremely low yields. It is risk aversion that is going to dominate."
The outlook for Europe looked increasingly poor as well, he said.
"So we will all be looking hopefully to China and hoping inflation there will ease and allow the People's Bank of China to ease up its credit rationing."
- with AP
