The Dow Jones Industrial Average was down 196.40 points (1.57 percent) to 12,304.90 in closing trade.

The broader S&P 500 shed 26.85 points (2.02 percent) to 1,305.09, while the tech-heavy Nasdaq Composite plummeted 74.79 points (2.63 percent) to 2,765.17.

The sell-off came as Democrats and Republicans continued their bitter standoff over raising the federal government's $14.29 trillion debt ceiling, despite frantic warnings from the US Treasury that failure to act by next Tuesday could force the government to default on its debts.

Copyright AFP (Agence France-Presse), 2011