The Dow Jones Industrial Average was down 318.24 points (2.86 percent) to 10,806.60. The broader S&P 500 was down 29.47 points (2.53 percent) to 1,137.29, whereas the tech-heavy Nasdaq Composite slumped 58.07 points (2.29 percent) to 2,480.12.
Earlier, stocks in Europe and Asia sank after the Fed warned of important downside risks to the economic outlook in the US among high unemployment, slow growth and a depressed housing market.
United Technologies plunged 7.0 percent, a day after it reached a deal to buy aerospace maker Goodrich for $18.4 billion, including $1.9 billion in supposed debt.
Caterpillar sank 4.6 percent, aluminum giant Alcoa was down 5.6 percent and chemicals firm DuPont dropped 5.8 percent.
Delivery firm Fedex, considered a barometer of the US economy, plunged 6.8 percent after it lowered its earnings forecasts for 2012, even as it reported that its previous quarterly profits beat expectations.
US Labor Department said that new preliminary jobless claims dropped last week, although remained at the painfully high level of 423,000, reflecting the relentless weakness of the US job market.
Bond prices surged as investors assembled to the safety of US government debt, with the yield on the 10-year Treasury note at one point sinking to a new record low of 1.754 percent.
The 10-year yield stood at 1.76 percent in late morning trade, down from 1.88 percent on Wednesday, whereas the yield on the 30-year bond was down to 2.81 percent from 3.04 percent the earlier day.