Global stock markets fell sharply after shock US jobs data ignited concerns about wider economic prospects.
The surprise 4,000 reduction in the US workforce in August sent the main Dow Jones index down 250 points to 13,113.
Analysts feared the job cuts meant that the recent market turmoil has spread to the wider US economy.
European shares and UK shares fell by 2%, with London's FTSE 100 falling 122 points, while Germany's Dax lost 185 points.
The August figure from the Department of Labor came as a surprise, because economists had anticipated data showing an increase of 110,000 jobs.
Yet as evidence of a credit squeeze continues in financial markets - sparked by the downturn in the US sub-prime mortgage sector - some financial services firms have already been laying off employees.
Hirings falter
The Department of Labor also cut its estimates for the number of new employees hired in June and July by a total of 81,000.
"It's dreadful... it seems to me almost inevitable we're heading for recession"
The last time the US economy shed jobs was four years ago in August 2003 when the total number employed fell by 42,000.
The figures come in the wake of former Federal Reserve Bank boss Alan Greenspan comparing current market conditions to those preceding earlier crashes.
Michael Metz, chief investment strategist at Oppenheimer & Co in New York, reacted to the latest employment figures with gloom.
"It's dreadful... it seems to me almost inevitable we're heading for recession," Mr Metz said.
The figures will add to pressure on the Federal Reserve to lower interest rates.
Fed chairman Ben Bernanke has stated that he is prepared to act to prevent credit difficulties sparked by the sub-prime crisis from damaging the US economy.
Record mortgage defaults
The US sub-prime mortgage sector concerns higher risk loans to people with poor credit histories or those on low incomes.
Higher mortgage rates over the past year have meant record levels of defaults in the industry.
The result has not only been significant financial difficulty for banks and investment firms heavily exposed to the sub-prime market, but also the recent stock market turmoil.
This is because of fears that the crunch in the sub-prime sector will spread to the wider loans market as banks become far more cautious about whom they lend to.
The situation has been exacerbated by the fact that sub-prime debt is often resold as part of a wider debt package, meaning that banks and investors are, as yet, unsure about how far the sub-prime downturn could spread.
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