Investors dumped assets that might be seen as risky and piled into the most conservative ones around: the dollar and U.S. government debt.
The market appears to be in "sell now and ask questions later mode," said John Canally, investment strategist at LPL Financial.
Since European leaders reached an agreement to rein in future government budget deficits last week, investors and credit-rating agencies have criticized the deal for failing to address current problems.
Italy had to pay higher borrowing rates in its last bond auction of the year Wednesday. The eurozone's third-largest economy paid 6.47 percent interest to borrow $3.95 billion for five years, up from 6.30 percent just a month ago.
The Dow Jones industrial average fell 131.46 points, or 1.10 percent, to close at 11,823.48. Caterpillar Inc. fell 4.4 percent, the worst drop among the 30 stocks in the Dow.
The Standard & Poor's 500 index fell 13.91 points, or 1.13 percent, to 1,211.82. The Nasdaq fell 39.96, or 1.55 percent to 2,539.31.
Gold dropped 4.6 percent to settle at $1,586, the lowest closing price since July. Commodity prices tend to fall when the dollar gains strength.
The yield on the 10-year Treasury note dropped to 1.91 percent from 1.96 percent late Tuesday as demand increased for ultrasafe assets. High demand for U.S. government debt helped the government sell $13 billion in 30-year bonds at a record-low rate of 2.92 percent.
The dollar also rose against other currencies. The euro shed about a penny against the dollar to $1.29 and has lost 3 percent in three days.
European markets fell broadly. Germany's DAX dropped 1.7 percent; France's main stock index lost 3.3 percent.
Energy stocks led the U.S. stock market lower after the price of crude oil lost $5 to $94.95 a barrel. Apache Corp. shed 5 percent and Chevron Corp 2.9 percent.
First Solar Inc. plunged 21 percent, the biggest drop in the S&P 500, after the country's largest solar company slashed its earnings estimate for the year. The solar industry has been hit hard by slower economic growth around the world and as government funding for alternative energy projects has dried up.
Avon jumped 5 percent, the largest gain in the S&P 500. The company announced late Tuesday that its CEO, Andrea Jung, would step down. The cosmetics company has been struggling with erratic financial results and is under scrutiny by regulators.
The Dow is down 3 percent for the week, while the S&P has lost 3.5 percent. The Nasdaq is down 4 percent.