The broader S&P 500 was down 29.47 points (2.53 percent) to 1,137.29, while the tech-heavy Nasdaq Composite slumped 58.07 points (2.29 percent) to 2,480.12.
Earlier, stocks in Europe and Asia sank after the Fed warned of "significant downside risks to the economic outlook" in the United States amid high unemployment, slow growth and a depressed housing market.
The warning overshadowed the Fed's announcement of a plan, dubbed "Operation Twist", to shift $400 billion in its shorter-term debt portfolio holdings to longer-term bonds in a bid to reduce long-term interest rates.
"The obvious conclusion appeared to be that investors see little potential impact from the Fed's action on near-term economic growth," said Frederic Dickson, chief market strategist for DA Dickson & Co.
Meanwhile, the bleak warning that came out alongside the Fed's policy move "cast more doubt about the ability of the economy to resume normal growth anytime soon," Dickson added.
All of the Dow's 30 blue-chip stocks were in the red, with industrials among the worst performers.
United Technologies plunged 7.0 percent, a day after it reached a deal to buy aerospace maker Goodrich for $18.4 billion, including $1.9 billion in assumed debt.
Caterpillar sank 4.6 percent, aluminum giant Alcoa was down 5.6 percent and chemicals firm DuPont dropped 5.8 percent.
Delivery firm Fedex, considered a barometer of the US economy, plunged 6.8 percent after it lowered its earnings forecasts for 2012, even as it reported that its last quarterly profits beat expectations.
Downbeat economic data from China and the eurozone also weighed on global market sentiment.
A preliminary manufacturing report from HSBC showed that activity in China had slowed for the third straight month in September.
Separately, a survey by London-based researchers Markit showed that economic activity in the eurozone hit reverse in September for the first time in more than two years.
"The discomfort of market participants is evident this morning as soft manufacturing readings out of China and the eurozone, and another weak initial claims report in the US, play into fears about a global recession," said Patrick O'Hare, an analyst with Briefing.com.
The US Labor Department said new initial jobless claims dropped last week, but remained at the painfully high level of 423,000, reflecting the persistent weakness of the US job market.
Bond prices surged as investors flocked to the safety of US government debt, with the yield on the 10-year Treasury note at one point sinking to a new record low of 1.754 percent.
The 10-year yield stood at 1.76 percent in late morning trade, down from 1.88 percent on Wednesday, while the yield on the 30-year bond was down to 2.81 percent from 3.04 percent the previous day. Copyright © 2011 AFP. All rights reserved For the latest updates PRESS CTR + D or visit Stock Market news Today
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