In the United States, there were reports that more people joined the unemployment line last week than a week earlier, gasoline prices contributed to higher inflation and manufacturing slowed in the mid-Atlantic.
In Europe, bank stocks slid on worries about the region's debt problems. In Asia, Japan's exports fell for the fifth straight month.
The U.S. and European economies are "dangerously close to recession," Morgan Stanley economists wrote in a report. "It won't take much in the form of additional shocks to tip the balance."
The Dow Jones industrial average fell 456 points, or 4 percent, to 10,954 at 1:55pm. in New York. The Dow was down as many as 528 points about a half-hour into trading.
The Standard & Poor's 500 index fell 55 points, or 4.6 percent, to 1138. All but three of the 500 stocks in the index fell. The Nasdaq composite fell 127, or 5 percent, to 2383.
"This is yet another stage of panic selling," said Gene Peroni Jr, a portfolio manager with Advisors Asset Management with $7.3 billion in client assets. "Investors are reacting first and asking questions later."
Last week was one of the wildest in Wall Street history. The Dow moved more than 400 points on four straight days for the first time.
But stocks had been relatively stable this week because investors were calmed by strong earnings reports and a flurry of corporate acquisition deals. The Dow had fallen 76 points Tuesday and risen four points Wednesday - the first time that the average rose or fell by less than 100 points on two straight days in nearly three weeks.
That ended Thursday. And with stocks down big, money flooded into U.S. Treasurys and gold, both considered safer investments.
The yield on the 10-year Treasury note briefly fell below 2 percent for the first time, before recovering to 2.09 percent. Low yields show that investors are willing to accept a lower return on their money in exchange for safety. Demand for government debt has stayed high, and yields low, even after Standard & Poor's stripped the United States of its top credit rating.
Gold rose to a record of $1829.70 per ounce before falling back to $1821.80. That's up from $1400 at the start of the year and more than double the price several years ago. The price of gold has set one record after another, with some investors looking for stability and others simply looking to cash in.
The Morgan Stanley economists cut their forecast for growth in developed economies this year to 1.5 percent from 1.9 percent. Over the past 20 years, growth for developed economies has been closer to 2.3 percent. The economists cited policy errors among other factors, including Europe's slow response to its debt problems and the partisan debate in Washington around the U.S. debt level.
Among Thursday's disappointing U.S. economic news:
- 408,000 people applied for unemployment benefits last week, up from 399,000 the week before and the most in four weeks.
- Inflation at the consumer level rose 0.5 percent in July, the highest since March. It had fallen 0.2 percent in June.
- Manufacturing has sharply weakened in the Philadelphia region, according to a report from the Federal Reserve. Manufacturing had been one of the economy's strongest industries since the recession ended in 2009, but its growth has slowed this year.
- The National Association of Realtors said the number of people who bought previously occupied homes dropped in July for the third time in four months.
The fresh signs of economic weakness underscore the challenge for the Federal Reserve as it tries to help the economy with prices rising and the job market weak, said Jack Ablin, chief investment officer at Harris Private Bank.
"Every time the economy got the sniffles, we had the Federal Reserve standing by with tissues," Ablin said. "This time around, I think the box is empty, and we're going to have to go through this alone. I think we can do it. It's just not something we're accustomed to."
The Fed has already said it will keep short-term interest rates super-low into 2013. But the risk of further stoking inflation may keep it from taking additional steps, such as an additional round of massive bond-buying.
In the meantime, worries about European debt hang over the markets. A default by any country would hurt the European banks that hold European government bonds, plus American banks that have loans to their European counterparts.
"Europe is the big question in the market, and nobody really knows what happens from here," said Scott Brown, chief economist at Raymond James.
On Thursday, stocks in industries that depend on a growing economy fell the most. Industrial stocks in the S&P 500 fell 5.6 percent, stocks of raw materials producers fell 5.5 percent and energy stocks fell 5.4 percent.
NetApp Inc. fell 16.4 percent, the most among stocks in the S&P 500. The maker of computer data storage products reported revenue for last quarter that fell short of analysts' expectations.
JDS Uniphase Corp., a maker of communications equipment, fell 12.6 percent after it gave a profit forecast for this quarter that was below analysts' expectations.
The smallest losses came from industries whose profits are less dependent on the economy. Utility stocks in the S&P 500 fell just 2 percent because customers still turn on the lights during a recession.
The VIX index, a measure of investor fear, rose 30 percent to 41. But it is still below where it was early last week, when it was at 48.
Crude oil fell $4.11 per barrel to $83.47 on worries that a weaker global economy will mean less demand. Falling prices for crude oil should work their way to the gas pump, though, and bring household budgets at least some relief.
Asian markets started Thursday's drop. Japan's Nikkei 225 index fell 1.3 percent. South Korea's Kospi stock index fell 1.7 percent, and India's Sensex index fell 2.2 percent.
The declines extended to Europe. In London, the FTSE 100 index fell 4.5 percent after a report showed that growth in British retail sales slowed more than economists expected last month. Germany's DAX index fell 6.6 percent.
