The Dow Jones Industrial Average was down 4.25 per cent, shedding 300.11 points to 6762.82 at the closing bell, its first close below 7000 points since 1997.
The broad-market Standard & Poor's 500 index sank 4.66 percent, down 34.28 points to a preliminary close of 700.81, its lowest since late 1996.
The Nasdaq fell 54.99 points, or 3.99 per cent to 1322.85, capping a calamitous session for global markets.
The market extended losses after a dismal week in which the Dow fell to its lowest level since 1997 and the S&P dropped to its weakest since 1996.
Market action came after the US government unveiled a fresh aid plan of $US30 billion ($47.6 billion) for AIG to stave off collapse of the ailing insurance company as it revealed massive new losses.
"The risk now is that a global adverse feedback loop is forming: As financial market problems persist, further declines in employment and corporate profits lead to loan defaults, which damage banks' bottom lines,'' said Joseph Brusuelas at Economy.com.
"The decline in equity prices for banks makes it more difficult to attract private capital and causes financial institutions to become more risk-averse and reluctant to lend.''
World markets were under pressure after British banking giant HSBC said it was seeking a huge capital injection to survive the global economic crisis.
HSBC revealed overnight that it needs nearly $US18 billion of new capital to withstand the financial crisis and announced 6100 job cuts after a profits collapse.
The bank reported a 70 per cent plunge in annual net profit last year and said it hoped to raise STG12.5 billion ($A28.03 billion) in a record British rights issue.
Government’s proposal for banks comes today
HSBC in 70pc profit hit, cuts 6100 jobs
Large banks take beating on Wall Street
