The Dow Jones industrial average sank 222.2 points or 2.85 per cent to 7580.42. "We just don't know how the Asian crisis is going to affect earnings. There's a sense of `shoot first, ask questions later'," said one analyst.
It was the third busiest session ever on the New York Stock Exchange with nearly 750 million shares traded. For the first week of this year, the Dow has lost 384.62 points or 4.8 per cent.
Next week, US corporate earnings reports will start to roll in and investors are beginning to expect some trouble.
Technology stocks, which rely more heavily on Asia for revenue growth, were hit even harder than blue chips. The Nasdaq Composite fell 52.35 points, or 3.37 per cent, to 1503.19.
In London, the FTSE-100 index had closed 98.8 points lower at 5,138.3.
Startlingly good jobs figures were part of what worried Wall Street. Employment in the US jumped by 370,000 in December, far more than any economist had been predicting. The increase followed a November increase revised up to 412,000, and took the number of Americans in employment to an all-time record of 64.1 per cent.
The pace of job creation has gathered steam, with an extra 3.2 million generated last year, up from 2.5 million in 1996. The unemployment rate stood at 4.7 per cent last month. The Labor Department described unemployment, at 6.4 million, as "essentially unchanged" from its quarter-century low.
Wall Street saw yesterday's jobs report as tilting the balance slightly back towards an interest rate rise at some future date. The figures were accompanied by news of only a small rise in average hourly earnings to $12.48, a cent up on the month. The December earnings figure was subdued, however, by the fact that there were three extra working days in the month, and is likely to bounce higher in January.
Earnings growth has climbed steadily to a rate of around 4 per cent in the latest quarter - still low given the drop in unemployment.
Meanwhile, in Indonesia the stock market looked poised to break its recent record of hitting new lows every day as prices actually rose in early trading, only to end the day with a 1 per cent fall. However, the local currency surged some 25 per cent.
This faint whiff of optimism came with news that Bill Clinton, the US President, had personally intervened in the crisis by way of a 25-minute telephone conversation with President Suharto, during which he secured Indonesian agreement to take the bitter medicine proscribed by the International Monetary Fund as the price for its $43bn bail-out.
Later in the day President Suharto issued a statement saying he would fully implement the IMF's plans.