The Dow Jones Industrial Average, which had lost more than 550 points during midday trading, staged a late rally that trimmed its losses by more than half as oil prices sank to a 13-year low.
The Dow ultimately fell 249 points, or 1.56 percent.
Energy companies were pummeled as the latest fall in the price of oil threatened more damage to an industry that has already been stricken with bankruptcies, layoffs and other cutbacks.
U.S. crude fell below $27 a barrel amid a global glut in oil supplies that won't go away. That's the lowest price since May 2003 and a far cry from the $100 a barrel it fetched in the summer of 2014.
While cheap oil is good for many companies and consumers, investors are worried demand is falling because the global economy is slowing down.
Chevron sank $3.03, or 3.7 percent, to $78.48, the biggest loss in the Dow average.
Overseas markets fared no better. Japan's Nikkei index entered a bear market, down 20 percent from its peak in June, and European benchmarks lost between 3 and 4 percent.
Gold and U.S. government bonds, traditional safe havens, rose in value as investors shifted money out of stocks.
U.S. indexes are down 10 percent or more since the beginning of the year.
The Associated Press contributed to this report.