The Dow Jones industrial average fell 104.14 points, or 0.8 percent, to 12,617.32. It was the third triple-digit point loss in row for the blue chip index. The last time that happened was September, when fears were rife that the U.S. was on the brink of another recession.
Lower earnings forecasts from corporate bellwethers like United Parcel Service combined with the weak report on manufacturing fed fears of more disappointing results from Corporate America in the coming days.
"Our guess is we haven't seen the worst," said Carl Yingst, chief market analyst at Joseph Gunner, an investment bank.
Investors around the world dumped stocks and fled to the relative safety of U.S. government debt. The yield on the benchmark 10-year Treasury note fell to another record low and the dollar hit a two-year high against the euro.
Stocks fell from the start of trading following news that UPS had cut its earnings forecast 4 percent for all of 2012. The package delivery company said it expects global trade to slow even more than the global economy this year, a first since the financial crisis. UPS's stock fell $3.61, or 5 percent, to $74.34.
Also weighing on stocks, Spain's borrowing costs spiked as investors worried that country could become the latest in Europea to ask for a financial lifeline. Spain's banks have already received help from international lenders.
The broader Standard & Poor's 500 fell 12.21 points to 1,338.31. The Nasdaq composite was off 27.16 points to 2,862.99.