After giving up all of its 1992 gains, the Dow stabilised after noon. In very heavy late afternoon trading, the 30-stock blue-chip index was off 21.61 at 3,179.00, but more cyclical stocks suffered heavier losses.
With US shares trading at historically high valuations despite weak corporate profits, the Federal Reserve's refusal last Friday to cut interest rates yet again was beginning to panic investors, traders said.
The mood was further soured by tumbling markets in Europe as exporters suffered from fears about recession overseas.
The re-entry of Ross Perot into the US presidential race clouded the outlook for many investors, many of whom fear it will virtually assure the election of the Democrat Bill Clinton in next month's election. Despite evidence that the performance of US share prices is unaffected by the choice of the party in the White House, the stock market is taking the most recent polls favouring Mr Clinton as bad news.
Restrictions on computer-assisted trading were triggered within minutes of the opening, forcing institutions to conduct their business manually. In Chicago, trading in market index futures was halted. Individual investors, fearful of the traditional volatility of October trading, largely withdrew from the market.
'The public buyers are just staying away,' said James Jones, president of the American Stock Exchange. 'This kind of market now just serves to drive off the public investor.'
Prices began to recover when a rumour swept the market that the Fed was planning to cut rates at a scheduled meeting today in coordination with a similar move by the Bundesbank. Economists dismissed the speculation but said the market slump might persuade US authorities to act independently.
The slump on Wall Street and in London was mirrored in other stock markets, where worries about the length of the global economic downturn were uppermost in investors' minds.
Frankfurt's DAX index fell 53.64 points to 1,460.63 and dropped a further 2.1 per cent in after-hours trading, bringing the daily fall to 5.7 per cent.
In Paris the CAC-40 index gave up 101.11 points to finish at 1,582.23. Japanese stocks also fell, with the Nikkei average dropping 222.57 to a closing 17,101.5.