The broad based Standard & Poor's 500 Index fell to its lowest level in 12 years on Monday amid investors' ongoing recession fears, dpa reported.
The S&P 500 lost 26.72 points, or 3.5 per cent, to 743.33, its lowest since April 1997.
Stocks began the day higher as President Barack Obama's economic team sought to ease fears that US banks are on the verge of either collapse or nationalization.
The Treasury, Federal Reserve and other government finance agencies issued a rare joint statement assuring investors that the administration "stands firmly behind the banking system during this period of financial strain."
A so-called "stress test" to review the health of 20 major banks is set to begin on Wednesday. The review could give struggling banks access to more emergency government funds.
Bank of America Corp gained 3.2 per cent and Citigroup earned 9.7 per cent on the news.
But the early rally was not enough to relieve broader investor fears. The blue-chip Dow Jones Industrial Average fell 250.89 points, or 3.4 per cent, to 7,114.78. The technology-heavy Nasdaq Composite Index dropped 53.51 points, or 3.7 per cent, to 1,387.72.
The US currency rose against the euro to 78.76 euro cents from 77.94 euro cents on Friday. The dollar also gained against the Japanese currency to 94.64 yen from 93.28 yen.