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With investors mindful of the 20th anniversary of the stock market crash on "Black Monday", the major indexes on Wall Street fell more than 1 per cent as heavy equipment maker Caterpillar said key industrial sectors it serves were in recession.
Caterpillar cut its profit forecast and warned the housing downturn was spreading to other parts of the economy.
The bleak comments from Caterpillar, which fell 3.6 per cent, helped drag down the shares of other big manufacturers, including 3M Co - off 6.5 per cent.
Crude oil prices falling from record highs drove energy companies' shares down, contributing to investors' shift from stocks to the relative safety of US government debt.
"There was some disappointing earnings news from industrials such as Caterpillar," said Jeffrey M. Mortimer, chief investment officer in equities at Charles Schwab Investment Management, in San Francisco.
"The market is trying to figure out how strong the economy is, if we're in for a 'soft landing' or potentially heading towards a recession."
The Dow Jones industrial average was down 178.10 points, or 1.28 per cent, at 13,710.86. The Standard & Poor's 500 Index was down 18.16 points, or 1.18 per cent, at 1,521.92. The Nasdaq Composite Index was down 36.18 points, or 1.29 per cent, at 2,763.13.
At its session low hit earlier in the day, the Dow was down 247.77 points, or 1.78 per cent, from Thursday's close.
The decline coincided with the 23 per cent drop on "Black Monday", October 19 1987, the Dow's biggest percentage drop on record.
Wachovia Corp, the fourth-largest US bank, posted a 10 per cent drop in quarterly profit, hurt by US$1.3 billion ($1.7 billion) of write-downs at its investment banking unit as credit markets tightened. Wachovia lost 1.3 per cent to US$47.50 on the New York Stock Exchange.
Soft North American results knocked down the shares of Schlumberger, the world's largest oil service company, which fell 10.1 per cent to US$100.38. This was the biggest percentage drop in Schlumberger's stock price since February 2001. Other oil and gas services companies' shares also dropped.
Caterpillar said machinery sales to non-residential builders were declining as fast as sales to residential builders, which it described as in "severe recession". Caterpillar fell to US$74.87.
Shares of 3M Co, another company considered a bellwether for the US economy, fell to US$88.61 as investors worried about falling profits in the LCD television market.
Exxon Mobil Corp shares dropped 1.1 per cent to US$93.99 as US crude shed 67 cents to US$88.80 after rising to a record US$90.07 a barrel overnight.
- Reuters
