The Dow lost 156.06 points to close at 12,442.49 on Thursday. It's now down 6 percent for the month so far and could be headed for its first losing month since September. The two-week slump represents a sharp turn downward since May 1, when the index closed at a four-year high.
The slide, which is largely due to escalating worries about a breakup of the European currency union, has stripped the Dow of much of this year's gains. As of the beginning of May it was up 8.7 percent for the year; now it's up just 1.8 percent.
"Europe is very much on investors' minds," said Brian Gendreau, market strategist at broker-dealer Cetera Financial Group. "It's been two years with multiple bailouts involving Ireland, Portugal and Greece and things don't seem to be getting better."
The dollar, Treasury prices and gold all rose as traders sought refuge in lower-risk assets. The yield on the 10-year Treasury note plunged to 1.70 percent, the lowest level of the year.
Caterpillar fell 4 percent, the most of the 30 stocks in the Dow, after reporting that global sales growth of construction and mining machinery slowed between February and April. Wal-Mart stock rose over 4 percent, the most in the Dow, after reporting a 10 percent jump in first-quarter income, beating Wall Street expectations.
Indexes opened lower on Wall Street following drops in European markets. The declines accelerated at mid-morning after the Federal Reserve Bank of Philadelphia said manufacturing slowed in the mid-Atlantic region for the first time in eight months. The report was far worse than analysts had been expecting.
The Conference Board said its measure of future U.S. economic growth fell in April after six months of increases. The drop came from fewer requests for building permits and a spike in applications for unemployment benefits.
These gloomy reports were a surprise and exacerbated investors' fears of turmoil in the global markets from developments in Europe where Greece seemed headed for an exit from the euro bloc.
Greece's caretaker Cabinet was sworn in Thursday and will hold power at least until next month's election. In the recently-held elections Greeks didn't given any party a majority, but they did give strong support to politicians who rejected the tough austerity measures that came with the country's financial bailout.
Without that rescue package, Greece will likely default and be forced to leave the 17-country euro zone, which would destabilize other countries that use the euro. German, French and Spanish stock markets all fell more than 1 percent.
The economic damage is already being felt by other members of the euro bloc.
Spain was forced to pay sharply higher interest rates to raise $3.18 billion in a debt auction Thursday. And shares of Bankia, which Spain nationalized last week, plunged 20 percent on a report from the newspaper El Mundo stating that depositors have withdrawn over $1 billion since last Wednesday.
Oil prices continued to trade lower, falling below $93 a barrel, extending a two-week sell-off, as traders worried about the potential impact on global growth from the European crisis. Crude oil has plummeted about 12 percent from $106 two weeks ago.
The one bright spot for the markets was the excitement surrounding the initial public offering of Facebook. The uber-popular social media company set the price of its shares at $38 apiece late Thursday. The stock is expected to start trading at 11 am Friday. Facebook is set to raise $18.4 billion, becoming the second largest IPO ever after Visa.
Among other stocks making big moves:
— GameStop fell 11 percent after the world's largest video game retailer reported its first-quarter profit fell 9.8 percent, as fewer customers visited its stores and bought new games and systems.
— Sears Holdings rose 3 percent after the beleaguered retailer turned a profit in the first quarter, benefiting from a gain on the sale of some stores.