The Dow Jones Industrial average was down more than 400 points around 1:45 p.m. Monday.
Monday was the first chance for global investors to respond to S&P's announcement late Friday that it was reducing its credit rating for long-term U.S. government debt by one notch, from AAA, the highest rating, to AA+.
The move wasn't a total surprise but came when investors were already feeling nervous about a weak U.S. economy, European debt problems and Japan's recovery from its March earthquake.
Fresh memories of the financial crisis three years ago are also driving investors away from risky investments and into what's considered safer.
"Fear of a repeat of 2008 is what's really driving investments," said Gary Schlossberg, senior economist with Wells Capital Management.
In other trading on Wall Street, the S&P 500 index fell 38 points, or 3.2 percent, to 1,161. The Nasdaq composite index fell 83 points, or 3.3 percent, to 2,448. The Dow was at 11,156, down 2.5 percent.
The S&P 500 is already down 10 percent so far in August. If it stays down just that much, it would be the worst month for the index since February 2009.
Stock markets in Asia began the global rout. The main stock index fell almost 4 percent in South Korea and more than 2 percent in Japan. European markets opened later and fell, too, with Germany down 4.4 percent and France 4 percent.
Gold, which investors traditionally buy when they want a safe investment, rose more than $60 per ounce, to $1,712. Monday was the first time gold was above $1,700 although after adjusting for inflation, its price remains below its 1980 record. Gold began the year at $1,421.40. It has climbed steadily as worries rose about high debt levels in both Europe and the United States. It went above $1,500 per ounce in late May.
Prices for U.S. government debt rose - even after S&P essentially said they were a riskier investment than the debt of some other major world economies - because Treasurys are still seen as one of the world's few safe havens. Prices rise as demand increases.
The yield on the 10-year Treasury note fell much of the morning, to 2.35 percent from 2.57 percent late Friday. A bond's yield drops when its price rises. The 10-year note's yield fell as low as 2.06 percent in 2008.
Where Treasury prices finish the day will be more important than where they are at the start, Bill O'Donnell, head of U.S. Treasury strategy at RBS Securities, wrote in a report.
"We will learn more about the future path of Treasury prices at today's close than we will by the open," he said. "I want to see how the market clears and how it synthesizes the cacophony of news of late."
Standard & Poor's also on Monday downgraded the credit ratings of mortgage lenders Fannie Mae, Freddie Mac and other agencies linked to long-term U.S. debt. Fannie and Freddie own or guarantee about half of all U.S. mortgages. Their downgrade could mean higher mortgage rates for consumers.
Worries about weaker profits that could result from a slowing economy have slammed the financial industry since late July. As a group, financial stocks in the S&P 500 index fell 4.9 percent on Monday to their lowest level since July 2009.
Bank of America Corp. has been the hardest hit. It fell 13.7 percent after AIG filed suit against the bank. The insurer alleged Bank of America sold it overvalued mortgage-backed securities. The bank denied the allegations. Its stock has dropped by nearly 50 percent this year.
Stocks in other industries whose profits are closely tied to the strength of the economy also fell sharply. Energy stocks in the S&P 500 fell 4 percent, for example.
The smallest losses came in safer industries whose profits tend to be steadier, regardless of the economy. Even in a bad economy people will still buy things like toothpaste and bread. Consumer staple stocks fell just 1.5 percent. Utilities, also a necessity for consumers, fell 2.8 percent.
The Vix index, a measure of fear among investors, shot up 19 percent to its highest level since May 2010. The index shows how worried investors are that the S&P 500 will drop over the next 30 days. It does this by measuring prices for stock options that investors can buy to help protect their portfolios.
Investors are worried that Spain or Italy could become the next European country to be unable to pay its debt. The European Central Bank said it will buy Italian and Spanish bonds in hopes of helping the countries avert a possible default.
Seeking to avert panic spreading across financial markets, the finance ministers and central bankers of the Group of 20 industrial and developing nations issued a joint statement Monday saying they were committed to taking all necessary measures to support financial stability and growth.
"We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets," they said.
Crude oil, natural gas and other commodities fell on worries that a weaker global economy will mean less demand. Oil fell $3.47 to $83.41 per barrel.
Last week, the Dow Jones industrial average fell almost 700 points. That was its biggest point loss since October 2008, during the financial crisis. The Dow has dropped in nine of the last 11 trading days.
Worries about the U.S. economic recovery have been building since the government said that economic growth was far weaker in the first half of 2011 than economists expected.
The economy grew at a 1.3 percent annual rate from April through June, below economists' expectations. It expanded at just a 0.4 percent rate in the first quarter. The first half of 2011 was the slowest since the end of the recession.
Then reports showed that the manufacturing and services industries barely grew in July. Job growth was better than economists expected last month. But the 117,000 jobs created in July were still well below the 215,000 that employers added between February and April, on average.
The Federal Reserve will meet on Tuesday, but economists don't expect much to come out of the meeting. The central bank's key interest rate is already at a record of nearly zero, where it has been since 2008. The Fed has also already said that it plans to keep rates low for "an extended period."
The central bank finished a $600 billion program in June to buy Treasurys in hopes of supporting the economy. Chairman Ben Bernanke said last month that the Fed would step in to help the economy if it further weakened. But some Fed policymakers oppose more bond purchases, saying it could lead to higher inflation.
Fears about a weaker U.S. economy have overshadowed profit growth that companies have reported for the second quarter. For the 441 companies in the S&P 500 that have already reported, earnings rose 12 percent in the second quarter from a year earlier. Revenue growth has also topped 10 percent for the first time in a year.
Tyson Foods rose 0.8 percent after it reported stronger profit than analysts expected. The largest U.S. meat company said its net income fell 21 percent because of higher grain costs, but analysts expected a steeper drop.
Tyson was one of just five stocks in the S&P 500 to rise on Monday. The biggest gain came from Newmont Mining Corp., which benefited from higher prices for the gold that it produces.