The Dow Jones Industrial Average dropped 119.15 points (1.66 per cent) to 7,062.93, capping a dismal month of February in which the blue-chip index lost some 11 per cent. The Dow closed at its weakest level since May 1997.
The broad-market Standard & Poor's 500 index retreated 17.74 points (2.36 per cent) to 735.09, its lowest close since December 1996.
The Nasdaq composite shed 13.63 points (0.98 per cent) to end at 1,377.84, the weakest since last November.
The market opened weaker and made several rally attempts but faded at the close.
Jon Ogg at 24/7 Wall Street said the market's relatively modest decline in the face of extremely bearish news suggested some resilience.
"While there is very little good news on the headlines, it does seem as though buyers are starting to nibble on positions," he said.
"The end of day drop today looks like it was an index rebalance issue for month-end, although there could always be the fear of holding into the weekend. In that case, today almost felt like a win."
The market reacted to news of a 6.2 per cent drop in US economic activity in the fourth quarter, worse than expected and far steeper than the earlier government estimate of a 3.8 per cent decline.
"While we now know that the US economy did indeed contract by a massive amount, early 2009 data suggests that the first quarter will also be quite grim," said economist Dina Cover at TD Bank Financial Group.
"Durable goods orders sank like a stone in January, indicating that capital expenditure by businesses in the US has continued to shrink. This suggests that business confidence is still extremely low."
Also denting sentiment was an announcement that the US government would own up to 36 per cent of Citigroup under a deal to convert up to $US25 billion ($A38.87 billion) of public capital injected into the ailing bank to ordinary shares.
The conversion does not call for more government funds but helps shore up the troubled banking giant's capital position, according to Citi and US officials.
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