The Dow Jones Industrial Average has closed down by 1,175 points in the biggest one day fall since the financial crisis.
The leading US stock market index closed down 4.6% at 24,345.75.
It is the worst drop in points since September 2008 when a plan to rescue the US banking industry was rejected.
The decline extended losses on Friday, when strong wage growth data raised the prospect of accelerated interest rate rises.
Monday's sell-off surpassed a 777.68 points drop on the Dow Jones on 29 September 2008 when Congress rebuffed a $700bn bank bailout plan following the collapse of US investment bank Lehman Brothers earlier that month.
US investors are reacting to small but significant changes in the outlook for the US economy, and what that might mean for the cost of borrowing.
On Friday, the US Labour Department released employment numbers which showed stronger growth in wages than was anticipated.
If salaries rise, the expectation is that people will spend more and push inflation higher.
To keep that under control, America's central bank will need to raise interest rates – which is what has spooked investors who were expecting the US Federal Reserve to increase rates two to three times this year.
They now fear there may be a few more interest rate rise.
The fall in share prices came as Jerome Powell was sworn in as the new chair of the US Federal Reserve and it underscores the challenge he faces – to make decisions that sustain the growth of the economy without alarming investors
The decline in the Dow was closely followed by the wider S&P 500 stock index, down 3.8% and the technology-heavy Nasdaq, down 3.7%.
In London, the FTSE 100 index of leading companies also fell to close down 1.46% or 108 points lower.
The Dow's dramatic fall marks a turnaround from January, when it raced past the 25,000 and 26,000 point milestones in less than a month.
'Concerned'
US President Donald Trump has tweeted a number of times about the increase in US stock markets since he was elected in November 2016.
Most recently he tweeted on 7 January: "The Stock Market has been creating tremendous benefits for our country in the form of not only Record Setting Stock Prices, but present and future Jobs, Jobs, Jobs. Seven TRILLION dollars of value created since our big election win!"
However, on Monday the White House told CNBC: "We're always concerned when the market loses any value, but we're also confident in the economy's fundamentals."
David Madden, market analyst at CMC Markets, said: "Equity traders were enjoying a bullish run recently, and the jolt from the major decline in the US last Friday has triggered a worldwide round of profit taking."
