The Dow Jones Industrial Average was recently down 165 points at 12,101, with all 30 of its components in the red. The blue-chip average first fell over 200 points to 12,265 at opening bells.

The S&P 500 fell 25 points at 1,381, while the Nasdaq Composite dropped 54.40 points to 2,361.

On Wednesday, stocks had rebounded somewhat from their plunge on Tuesday, finding comfort in a partial recovery of the Shanghai stock market, whose 9% slide spooked global markets earlier in the week.

Investors also welcomed soothing words from Federal Reserve Chairman Ben Bernanke who said that while there was no single trigger to Tuesday's market slide, financial markets "seem to be working well."

But according to Marc Pado, the Wednesday rebound was not convincing enough.

"If Tuesday was just an aberration, then we should have gained back half of the loss," he said. "Being up 50 points when we should have been up 200 or more means that the economic data and investor sentiment was worth 150 points of downside pressure."

On Thursday, major Asian markets, including China, Japan and Hong Kong, ended lower as investors focused on developments in Shanghai, where shares gave back about two-thirds of gains from the previous day.

There was also renewed concern that the yen carry trade, which has been a major source of funding for investors globally, might be subsiding.

In addition, rumors that a big lender was in distress were floating around the market, according to research firm Action Economics.

Amid concerns over the health of the mortgage lending market, SunTrust Banks revised down its fourth-quarter earnings to $498.6 million, or $1.39 a share, from the previously reported $523.6 million, or $1.46 a share, following the resolution of a previously reported large non-performing loan.

Also, the latest news on U.S. inflation, showing a 0.3% rise in core inflation, confirmed the Federal Reserve's view that inflation remains a critical risk to the economy.

"Investors are worried about the strength in the economy and the Fed's assumption that housing has hit bottom," said Pado.

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