The poor demand for German government bonds showed that investors viewed investing in the euro zone as being too risky.
Debt problems plaguing Europe and the United States have pressured markets, knocking the S&P 500 down more than 7 percent over the last six sessions. World stocks hit their lowest in six weeks on Wednesday.
"A poor auction of German bonds added to recent worries that the risks from the debt mess are spreading to the core of the euro zone," said WhatsTrading.com options strategist Frederick Ruffy.
All 10 S&P 500 sectors were negative, with financials among the biggest decliners over concerns about exposure to European debt. JPMorgan Chase & Co (JPM.N) dropped 3.5 percent to $28.38 and Citigroup Inc (C.N) lost 3.9 percent to $23.51.
Economically sensitive stocks such as energy and commodity-related issues also slid. The PHLX oil service sector index .OSX dropped 3.7 percent and the S&P materials sector .GSPM fell 2.8 percent. Schlumberger Ltd (SLB.N) lost 3.6 percent to $66.50 and DuPont and Co (DD.N) shed 2.9 percent to $44.08.
The Dow Jones industrial average finance/markets/index?symbol=us%21dji">.DJI sank 236.17 points, or 2.05 percent, to 11,257.55 at the close. The Standard & Poor's 500 Index .SPX dropped 26.25 points, or 2.21 percent, to 1,161.79. The Nasdaq Composite Index .IXIC lost 61.20 points, or 2.43 percent, to 2,460.08.
The S&P 500's six-day decline is the longest such streak since a seven-day slide that ended August 2.
Reflecting heightened fears in the market, the CBOE Volatility Index, or VIX .VIX, Wall Street's so-called fear gauge, jumped 6.3 percent.
Volume was light ahead of the U.S. Thanksgiving holiday, when markets are closed. About 6.9 billion shares changed hands on the New York Stock Exchange, NYSE Amex and Nasdaq, below the current daily average of 8 billion shares.
"There is no buying demand, but this does not mean that there is a really strong offer, either. It just means that we might be working off the 'oversold-ness' with this choppy action, 1160-1180 on the S&P," said Joseph Cusick, senior market analyst at OptionsXpress Holdings Inc in Chicago.
One of the few bright spots was Deere & Co (DE.N), which climbed 3.9 percent to $74.72 after quarterly earnings beat expectations and sales shot up 20 percent.
Adding to market worries, data showed Chinese manufacturing shrank the most in 32 months in November, intensifying concerns about a global economic slowdown. U.S. crude oil fell 1.8 percent on fears of reduced demand from China, the world's No. 2 economy.
U.S. data painted a mixed picture and showed little reason for optimism. New jobless claims rose last week and consumer spending barely increased in October, while another report showed new orders for durable goods, which include long-lasting manufactured items such as refrigerators, rose.
