The Dow Jones Industrial Average slid 120.24 points (0.98 percent) to 12,114.10, as selling accelerated late in the day. It closed out the worst week for the blue-chip index in nearly four years, with a loss of 4.2 percent.

The tech-rich Nasdaq composite meanwhile slumped 1.51 percent for the day to 2,368.00, while the broad-market Standard and Poor's 500 index lost 1.14 percent to 1,387.17.

Market participants said a rising yen was feeding fears of a squeeze on hedge funds which have borrowed the Japanese currency at rock-bottom interest rates to fund higher-yielding investments elsewhere.

Concerns also resurfaced about the US housing sector after one major lender reported delinquencies surged 19 percent last year while US regulators demanded tougher standards for certain mortgages.

Andrew Busch at BMO Capital Markets said investor confidence has been hammered, making a recovery difficult.

"When you have the upheaval we did, it's almost impossible for investors to feel confident to do anything but reduce risk," he said.

European and Asian markets were mainly lower. The London FTSE 100 was flat, showing a fractional gain of 0.2 points at 6,116.20. In Paris the CAC 40 fell 0.62 percent to 5,424.70 and in Frankfurt the Dax shed 0.56 percent to 6,603.32.

In Canada, Toronto's TSX composite slipped 0.91 percent for the day.

In Tokyo, the benchmark Nikkei 225 index closed down 1.35 percent, dropping for a fourth straight day to extend its losses to 5.3 percent over the week.