The figures suggest that the US economy, already weakened by a year-long slowdown in industrial output, may have been pushed into recession by the 11 September attacks on New York and Washington.
According to the US Commerce Deparment, consumer spending tumbled by 1.8% on the month, reversing a surprise 0.3% gain in August.
Household expenditure has not fallen this steeply since January 1987, while the last time consumer spending contracted was in May 1999, the US Commerce Department said.
The decline in spending during September was far steeper than the 0.9% anticipated by analysts.
Worst fears confirmed
The lower spending figures confirm the worst fears of economists who predicted that the 11 September terrorist attacks would severely dent US consumer confidence.
Prior to the September attacks, US consumers' seemingly unquenchable appetite for goods and services looked set to save the world's largest economy from a full-blown contraction.
More bad news
The National Association of Purchasing Managers' monthly manufacturing survey for October compounded the bad news.
The NAPM index, a composite index designed to reflect the overall health of the manufacturing sector, plummeted by 7.2 points on the month to 39.8.
A reading above 50 on the NAPM index denotes expansion, while a score below 50 indicates a contraction.
In a sign that US manufacturers are unlikely to stage a rapid recovery, a separate NAPM index measuring new orders plunged to 38.3 in October, down from a surprisingly healthy 50.3 in September.
Analysts attributed the slump in new orders to the cancellation of corporate investment projects in the wake of the 11 September attacks.
"The manufacturing sector received a very significant setback driven by the events of 11 September," said NAPM President Norbert Ore.
Pessimism
Earlier in the week, the leading independent survey of consumer confidence, the Conference Board, said it had also found confidence falling sharply.
"We have had a second large decline...consumers are telling us that current conditions have eroded quite quickly and they are very pessimistic looking ahead," the Board's director Lynn Franco told the BBC's World Business Report.
"The erosion was going on well before 11 September and the massive lay offs that have resulted as of the events of the eleventh have only compounded the problem," he added.
Jobless numbers up
NAPM's employment index fell from 41.2 in September to 35.1 last month, reflecting a wave of redundancies in the US manufacturing sector.
Separate figures from the US Labor Department showed that the number of people claiming unemployment benefit rose to an 18-year high of 3.69 million during the third week of October.
Analysts predict that full October jobs data to be released on Friday will show that 289,000 jobs were lost last month.
Markets wobble
The weak manufacturing and spending figures prompted a sell-off in US stocks, forcing the Dow Jones index of leading shares 18 points lower shortly after 1500 GMT.
However, the selling pressure was tempered by the view that the gloomy data make it more likely that the US Federal Reserve will cut US interest rates by half a percentage point when it next meets on November 7 and 8.
The Fed has already cut interest rates nine times this year, to 2.5%, in a bid to stave off recession.
On the currency markets, the US dollar fell to a two week low of 91 cents against the euro on the news.