Recession fears have seen profit-taking on Wall Street
Fears the global economy may not be able to avoid a recession pushed US share prices lower, despite a $250bn government bank rescue plan.
The Dow Jones index ended down 0.82% as investors turned their attention to the worsening economic outlook.
While bank shares were largely higher because of the US Treasury rescue plan, technology stocks fell.
Traders say Wall Street is expected to be nervous in the weeks ahead because of economic worries.
"The tone is cautious, I don't think anybody is pile-driving into the market," said Lincoln Anderson, chief investment officer at LPL Financial in Boston.
"We certainly expect heightened volatility for a fair amount of time while we sort out just exactly what's going on," he added.
DOW JONES INDUSTRIAL AVERAGE: 14 October 2008
*All Times GMT
The US government has announced a $250bn (£143bn) plan to purchase stakes in a wide variety of banks in an effort to restore confidence in the sector.
President George W Bush said the move would help to return stability to the US banking sector and ultimately help preserve free markets.
US federal authorities will also temporarily insure most new debt issued by US banks and expand deposit insurance.
Among financial stocks, Morgan Stanley rose 21.2%, Bank of America was up 16.4%, Citigroup soared 18.2% and Wells Fargo rose 10.2%.
Investors have welcomed the US government's action but fears of a recession rather than a financial meltdown have now come to dominate thinking.
"The world is not going back to where it was before September," said Andrew Busch, a strategist with BMO Capital Markets in Chicago.
"The outlook for the economy has soured and we're still not sure by how much," he said.
In the US technology sector, profit worries drove chipmaker Intel down 6.2%.
Intel then rose modestly in after-hours trading as it reported a 12% rise in its third-quarter earnings.
Earlier stock markets worldwide had risen, as investors bet that state action to strengthen the banking system would ease the credit crisis.
In Europe, Germany's Dax ended up 2.7%, while the UK's FTSE added 3.2%.
Nobel prize-winning economist Joseph Stiglitz assesses the situation
The US move follows similar steps taken by the UK and other European governments.
BBC business editor Robert Peston said the US and eurozone plans were variations on the template launched a week ago by the UK government despite reservations expressed by other leaders.
"If HM Treasury were the corporate finance department of one of those battered investment banks that are now being rescued, it would be collecting a very fat fee," he said.