The Dow Jones Industrial Average tumbled 543.54 points, or 1.66 percent, to 32,254.86. The S&P 500 sank 73.69 points, or 1.85 percent, to 3,918.32. The Nasdaq Composite Index shed 237.65 points, or 2.05 percent, to 11,338.35.
All the 11 primary S&P 500 sectors ended in red, with financials and materials down 4 .1 percent and 2.54 percent, respectively, leading the slide.
The Cboe Volatility Index, widely considered as the best fear gauge in the stock market, spiked 18.32 percent to 22.61.
The U.S. Labor Department reported Thursday that the number of Americans filing for unemployment benefits increased by 21,000 to 211,000 for the week ending March 4. Economists polled by The Wall Street Journal had forecast new claims to total 195,000.
Despite the jump in claims, the labor market remains robust with reports on U.S. private payrolls and jobs openings released this week showed solid hiring and demand for workers.
The more closely-watched February U.S. employment situation report, which will include employment data from both the private sector and the government, is slated for release on Friday by the Labor Department's Bureau of Labor Statistics.
Fed Chair Jerome Powell on Wednesday indicated that no decision had yet been reached on whether to step up the pace of monetary tightening in March. The outcome, he suggested, was likely to hinge on "some potentially important data coming up."
"In particular, the Fed is likely to be focusing on this week's employment release and next week's consumer price index, both for February," UBS analysts said in a note on Thursday.
"We believe the most important focus for markets is not the outcome of Fed policy in a single meeting, but rather expectations of how high rates will go and how long they will remain high for," they said.
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