Goldman Sachs set the tone for the session when it recommended investors sell the shares of Citigroup saying the bank may have to write off $15 billion as mortgage losses reduce earnings.
The world's biggest reinsurer, Swiss Re, also fed worries that losses from the global credit crisis may widen, with its announcement of a $1.07 billion write-down.
The Dow Jones industrial average was down 218.35 points, or 1.66 percent, to end at 12,958.44. The Standard & Poor's 500 Index was down 25.47 points, or 1.75 percent, at 1,433.27. The Nasdaq Composite Index was down 43.86 points, or 1.66 percent, at 2,593.38.
Investors also had to contend with more disappointing news on the housing front. The Dow Jones U.S. Home Construction Index fell to its lowest level in 4 1/2 years, after an industry group said U.S. home builder sentiment stayed at a record low in November.
The National Association of Home Builders said potential buyers canceling orders or facing higher hurdles getting mortgages from lenders kept builders inundated with unsold houses.
In addition, Lowe's Cos. Inc, the No. 2 U.S. home improvement chain, slashed its full-year profit outlook, while Credit Suisse said Freddie Mac, the No. 2 U.S. home funding source, may suffer between $1 billion and $5 billion of losses on risky subprime mortgages.
Four stocks fell for every one that rose on the NYSE and the Nasdaq.