The Dow Jones index closed below 11,000 for the first time in two years on Tuesday.
Shares in mortgage finance companies Freddie Mac and Fannie Mae fell by more than 25% on fears that a government plan to stabilize the companies will dilute the value of their shares.
Shares of Freddie Mac slumped 26% to $US5.26 while Fannie Mae shares lost 27.3% US7.07.
The whole banking sector finished lower. The price of crude oil also plunged.
Earlier, Federal Reserve Chairman Ben Bernanke said the banking system is well capitalized, but also said that financial markets remain under "considerable stress."
However, the Nasdaq edged up as investors bet on the technology sector.
The Dow Jones industrial average dropped 92.65 points, or 0.84%, at 10,962.54. It was the first time the index has closed below 11,000 since July 2006.
Standard & Poor's 500 Index fell 13.39 points, or 1.09%, at 1,214.91. The Nasdaq Composite Index was up 2.84 points, or 0.13%, at 2,215.71.
Trading volume was moderate on the New York Stock Exchange, with about 1.85 billion shares changing hands. About 2.7 billion shares were traded on the Nasdaq.
Other markets also down
European stocks fell 2.1% to a three-year closing low on Tuesday.
The FTSEurofirst 300 index of top European shares ended 2.1% lower at 1,110.09 points - its lowest close since May 2005. The index is down 26% for the year to date.
Around Europe: Germany's DAX index ended down 1.9% and France's CAC 40 shed 2%.
Britain's top share index had its lowest close since October 2005.
The FTSE 100 fell 128.5 points, or 2.4% at 5,171.9, and is now down almost 20% for the year to date.
The New Zealand share market continued to fall on Tuesday, with the NZX 50 index closing down 39 points to 3040.
In the currency markets: at 8.25am on Wednesday, the New Zealand dollar was trading at US77.19 cents, 78.86 Australian cents, 38.50 pence, 80.83 yen and 0.4853 euro. The Trade Weighted Index was at 68.04.
The Australian share market plunged 2% on Tuesday.
The S&P/ASX200 index was down 105.3 points, or 2.14%, to 4815.7, while the All Ordinaries dropped 97.8 points, or 1.95%, to 4910.1.
At 1615 AEST on the Sydney Futures Exchange, the September share price index contract was 126 points lower at 4,811, on a volume of 28,216 contracts.