It was the biggest one-day fall on Wall Street since Black Monday in 1987
US share prices have plummeted nearly 8% on renewed global recession worries, despite government action to strengthen the financial system.
The Dow Jones index fell 733 points to 8,577 points, in its biggest percentage fall since 26 October 1987.
The panic later spread to Asian markets, with Japan's Nikkei average dropping more than 4% in early trading.
Earlier, there were similar plunges in European markets - London fell 7% and Frankfurt and Paris both lost 6%.
Ben Bernanke, the chairman of the Federal Reserve, warned that the US economy now faced a "significant threat" from the credit crisis.
Treasury Secretary Henry Paulson has hinted he does not expect to return to the post in the new US presidential administration which will follow the November election.
In an interview on CNBC, he said he meant to ensure a "first-rate transition", "whoever the new treasury secretary is".
Some on Wall Street have expressed concern about Mr Paulson leaving in the midst of the credit crisis, Reuters news agency reports.
Many investors are now convinced that the US economy, if not already in a recession, is moving towards one.
Meanwhile the leaders of the G8 major industrialised nations have agreed to hold a summit with other countries to discuss global financial reform.
The move follows a call by UK Prime Minister Gordon Brown to rebuild the IMF to help regulate the world's financial systems.
Mr Brown told the BBC that the meeting would take place in "the next few weeks".
In the US, the economic impact of the credit crisis was highlighted in two reports published on Wednesday.
September retail sales recorded their biggest monthly decline in more than three years, while a Federal Reserve report showed economic activity had weakened across the country.
In a speech in New York, Mr Bernanke said the US had avoided making the mistakes that helped plunge the country into the 1930s Great Depression.
He pledged that the Fed would continue to fight the credit crisis. But he warned it would take time for the country's economic health to mend.
"The turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth," he said.
"The last decade has shown that bursting bubbles can be an extraordinarily dangerous and costly phenomenon for the US economy."
Reaction to Mr Bernanke's speech was mixed.
Kim Rupert, of Action Economics in San Francisco, said: "There was only a little bit of mention of the economy but it was all pretty much stuff that we already knew."
Cary Leahey, of Decision Economics in New York, said: "He is basically doing a stand-and-be-counted speech to an elite audience in New York.
"He is saying 'we will not stand down until the system is repaired' and 'we will use every resource to ease the crisis'," he added.
Earlier in Europe, markets were also badly hit by fears of recession - the UK's FTSE 100 fell 7.16%, Germany's Dax shed 6.49% and France's Cac 40 lost 6.82%.
"The inevitable reversal for equity markets does seem to be under way," said Matt Buckland, a dealer at CMC Markets.
However, there were signs that banks were becoming more willing to lend to each other.
The cost of borrowing between banks, as measured by London interbank offered rates (Libor), fell slightly on Wednesday.
It was the second consecutive session that Libor rates for euros, dollars and pounds had eased, and the cost of borrowing fell for all loan durations - from overnight to one year.