Stocks across Europe and on Wall Street plunged as investors responded to the US losing its top-notch credit rating, overwhelmed with concern that the world's largest economy will lose further steam.
Reuters described the trading as "panicked selling on heavy volume" with every stock in the benchmark S&P 500`s index ending in negative territory.
The Dow Jones industrials closed down 634 points, or 5.5 per cent, to 10,809. It was the first time the Dow fell below 11,000 since November and its biggest one-day point drop since December 2008.
The S&P 500 is closing down 79 or 6.7 per cent, at 1,119.46. The Nasdaq is down 174.72, or 6.9 per cent, at 2,357.69. More than 69 stocks fell for every one that rose on the New York Stock Exchange. Trading volume was heavy at 9.7 billion shares.
Earlier in Europe, the Stoxx 600 Index ended the day with a 4.1 per cent slide, officially entering a bear market.
"This is compounding the concerns we already had about Europe and the pace of economic growth," John Carey, portfolio manager at Pioneer Investment Management in Boston, which has about US$260 billion in assets under management, told Reuters.
"People are asking, 'Can the economy still grow in the face of all this?'"
The CBOE Volatility Index, Wall Street's so-called fear gauge, soared more than 43 per cent.
"The downgrade is just one factor in a very broad issue - this is becoming a synchronised global growth slowdown," Ian Harnett, head of European strategy at Absolute Strategy Research told Bloomberg Television.
"Markets on both sides of the Atlantic are discounting not only a recession, but actually a very aggressive recession."
Amid the turmoil investors are turning to US Treasuries. Two-year yields dropped to a record after Japanese Finance Minister Yoshihiko Noda said Treasuries were attractive, Bloomberg News reported.
The two-year note yields plunged as much as six basis points to the all-time low of 0.2283 per cent, below the previous 0.2527 per cent record reached on August 4, according to Bloomberg.
That bodes will for the Treasury's three debt auctions totalling US$72 billion this week.
In this climate, the Federal Open Market Committee is expected to keep the fed funds target rate at zero to 0.25 per cent tomorrow, according to the median forecast of 101 economists in a Bloomberg News survey.
Today, ratings agency Moody's Investors Service told Reuters it might also downgrade the US government's credit rating if its planned measures to reduce its budget deficit turned out to be not "credible" after all.
"If the process for further deficit reduction that is included in the budget control act produces results that are not really credible, that combined with the economic performance could potentially cause an early move on the rating," Moody's analyst Steven Hess told Reuters in an interview in his first comments after Friday's move by rival rating agency S&P.
While all 10 S&P sectors fell more than 2 per cent, losses were led by those industries most sensitive to the economy. The S&P financial index plummeted more than 8 per cent while the S&P energy index tanked nearly 7 per cent.
Britain and several euro zone countries are likely to have their credit ratings cut in coming months as debt problems worsen, and Western policymakers are bound to embark on more quantitative easing to get their economies moving, American investor Jim Rogers told Reuters on Monday.
He also said Standard & Poor's acted too slowly in stripping the United States of its AAA rating on Friday, and that he remained bullish on commodities as investors turned to real assets amid fears of further quantitative easing by the US and European central banks.
"The idea that the US is downgraded and the UK is not is lunacy. There are many countries, Belgium, Spain, lots of countries in Europe, that should be downgraded just as the US has been downgraded," Rogers said in an interview with Reuters Insider.
The Japanese yen and Swiss franc benefitted from a flight to safety. The Swiss currency rose to records against the greenback and euro.
Gold rose to another record, while silver advanced too, as investors looked for assets that will maintain value.
Spot gold last traded 2.8 per cent stronger at US$1,708.59 an ounce. Earlier in the session it rose to a record $1,715.01.
Silver climbed 2.9 per cent to US$39.39 an ounce.
"Investors are looking upon the [European Central Bank] bond-buying as the first step toward the same kind of quantitative easing program the Fed is doing. So, gold acts as the only currency that you can't print more of, and you are seeing a huge institutional demand for it," James Rife, an assistant portfolio manager at Haber Trilix Advisors, which manages US$2 billion in assets, told Reuters.
Oil suffered from the worsening expectations for the global economy, with US crude oil futures dropping 6.1 per cent to US$81.57 a barrel.