There were also fresh concerns over the health of Citigroup, considered the most vulnerable among the major U.S. banks.
The Standard & Poor's 500 Index was down Thursday 6.7 percent to the 752 level, and the Dow Jones industrial average fell about 445 points, or 5.6 percent. World stock markets also tumbled, with Tokyo and Seoul losing almost 7 percent each and Japan suffering its biggest drop in exports in seven years.
Citigroup shares tumbled below $5 a share for the first time in 15 years despite Saudi Prince Alwaleed bin Talal increasing his stake to 5 percent from less than 4 percent -- roughly a $350 million investment.
Citigroup has racked up more than $20 billion in losses over the past four quarters, and the expectation is that it will post another large loss in the fourth quarter. The bank's stock has plummeted about 80 percent since the beginning of the year and is down about 90 percent from its trading record of $57 a share in December 2006.
In the meantime in Washington, Congress hurriedly approved legislation Thursday to keep unemployment checks flowing into 2009 for a million or more laid-off Americans whose benefits were running out. President George W. Bush is expected to sign the measure, which is estimated to cost about $6 billion.
The Senate's vote followed Thursday's Labor Department report that new claims for unemployment benefits had reached a 16-year high and the number of Americans searching for work had surged past 10 million.
The report said claims jumped last week to 542,000, the highest level since July 1992, and a rapidly weakening job market is expected to get even worse next year.
Congressional Democrats have sought to move legislation that would direct $25 billion from the $700 billion financial rescue plan to the automakers to ensure they can stay in business until the spring. They abandoned those plans this week in the face of resistance from the White House and Senate Republicans.
"We are prepared to come back into session the week of Dec. 8 to help the auto industry," Senate Majority Leader Harry Reid said Thursday. "But only if they present a responsible plan that gives us a realistic chance to get the needed votes."
The White House said Thursday that Mr. Bush could support a compromise Senate auto deal known as the Bond-Levin agreement, the Associated Press reported.
The bipartisan group made of senators from key auto manufacturing states -- Michigan Democrats Carl Levin and Deborah Stabenow, Missouri Republican Kit Bond, Ohio Republican George Voinovich and Democrat Sherrod Brown, and Pennsylvania Republican Arlen Specter -- said their bill could pass because the loan would come from the Energy Independence and Security Act passed in 2007, not the financial rescue plan.