US stocks plunged in late trade Wednesday after the Fitch ratings agency warned that contagion from the frail eurozone could hit US banks badly.
Europe's markets closed mixed earlier, showing patience even as debt markets continued to push most European government borrowing costs dangerously higher.
The US bourses were in the plus zone in mid-afternoon when the Fitch report sent them tumbling.
"US banks could be greatly affected if contagion continues to spread beyond the stressed European markets" of Greece, Ireland, Portugal and Spain, it said.
While keeping its ratings outlook for US banks "stable" for the time being, Fitch said: "Nonetheless, the risks of a negative shock are rising and could alter this view, even for banks with little or no exposure to Europe."
The Dow Jones Industrial Average finished 1.58 percent lower at 11,905.59; the S&P 500 fell 1.66 percent to 1,236.91; and the Nasdaq Composite lost 1.73 percent to 2,639.61.
Earlier, EU markets were calmer. In London, the FTSE-100 closed down 0.15 percent to 5,509.02 points. Paris's CAC-40 gained 0.52 percent to 3,064.90 points, and Frankfurt's DAX 30 dropped 0.33 percent at 5,913.36 points.
Milan gained 0.80 percent and Madrid was up 0.81 percent.
"European stocks remain volatile as the market struggles to maintain a firm trend in either direction," said ETX Capital trader Manoj Ladwa.
"Given ongoing sovereign debt issues, and growth in the eurozone stagnant at best, markets are likely to remain undecided for the foreseeable future."
Dealers said there was some respite as Italy and Greece put in place new governments committed to tough economic reforms.
But all eurozone nations bar powerhouse Germany were still roughed up on the bond markets.
Italian benchmark 10-year bond yields once again topped the 7.0 percent red-zone level, with Spain hit too after it had to abandon its 2011 growth target of a very modest 1.3 percent.
"Contagion has spread across eurozone bond markets like wildfire and the lack of action to create a firewall means that there is little to extinguish it," Credit Agricole said in a note to clients.
The euro sagged further in the gloom.
It fetched $1.3451 at around 2200 GMT, down from $1.3536 at the same time Tuesday. Earlier in the day it hit $1.3429, the weakest level for the currency since October 10.
In Asian trade earlier Wednesday, Tokyo lost 0.92 percent, Hong Kong sank 2.0 percent, Sydney fell 0.89 percent and Shanghai ended 2.48 percent down..