Earlier, gold had soared to a record as concerns about the eurozone debt crisis spurred appetite for safer investments and drove the demand for US Treasury debt. The dollar reached its strongest level in a year versus a basket of key currencies. Stocks and oil prices plunged despite data showing US retail sales and industrial production rose in April. The three major US stock indexes fell nearly 2 percent or more while US crude oil futures prices slumped nearly 4 percent or almost $3 below $72 a barrel.
European authorities announced a massive debt safety net for Greece, Spain and Portugal this week, but investors remain sceptical those countries can take the pain of overhauling weak public finances. "If you look long-term, everyone is worried about what these austerity measures will mean in terms of growth," said Kathy Lien, director of currency research at GFT in New York.
The Dow Jones industrial average lost 207.76 points, or 1.93 percent, at 10,575.19, while the Standard & Poor's 500 Index fell 27.09 points, or 2.34 percent, to 1,130.35. The Nasdaq Composite Index was down 62.85 points, or 2.62 percent, at 2,331.51.
Shares of credit card companies tumbled a day after the US Senate voted to limit fees charged on credit and debit card transactions. Visa Inc lost 10 percent and MasterCard Inc shed 9 percent. The MSCI world equity index plunged 2.7 percent, while the FTSEurofirst 300 index dropped 3.39 percent to close at 1,014.25, with banks taking a beating.
The STOXX Europe 600 banking index was down around 5.2 percent. Spanish banks Banco Santander fell 8.98 percent and BBVA lost 7.58 percent. US crude oil fell 3.86 percent to $71.53 per barrel, after hitting a session low of $71.05, the lowest since February 8.
The EU's emergency assistance plan has done little to bolster confidence in the euro system, a concern highlighted by US While House Economic Adviser Paul Volcker. On Thursday Volcker said European debt troubles could undermine the single currency.
The euro slid as low $1.2358 on electronic trading platform EBS, the lowest since October 2008. It last traded at $1.2393. "The euro hasn't derived any benefits from any budget cuts from Spain and Portugal," said Chris Turner, head of FX strategy at ING, which forecasts the euro will be at $1.15 in six months.
"People are either concluding that these cuts will be unsuccessful and debt sustainability remains a key issue, or they will be successful in aggressive fiscal tightening and that these economies would slow aggressively and the European Central Bank has to keep interest rates low," he added. Gold prices, which often climb in times of risk aversion, earlier soared to a record high of $1,248.95.
But when gold didn't hit $1,250 or break above it, investors started selling the metal and it slid to a session low of $1,219.05. By early afternoon in New York, spot gold was trading at around $1,226.85. The safe-haven appeal of US Treasuries also rose dramatically, with the price of the benchmark 10-year note up 24/32, while its yield slipped to 3.444 percent shortly after 1700 GMT in New York.
Investors' anxiety towards riskier assets also has been reflected in the movement of cash between markets this week. Money market funds, perceived to be among the least risky investments, attracted new money this week for the first time since January as investors moved back into cash, data from EPFR Global showed. At the same time, the amount of money pulled from risky, high-yield bond funds hit a five-year high, while equity funds in emerging markets also suffered.