An hour after the opening bell, the Dow was down 274 points, or 2.4 percent, to 10,961. All 30 stocks that make up the Dow average fell.
The S&P 500 lost 30, or 2.6 percent, to 1,143. The Nasdaq composite fell 56, or 2.3 percent, to 2,424.
Bank stocks fell more than the overall market. Federal regulators filed lawsuits late Friday against 17 major banks, saying they sold Fannie Mae and Freddie Mac billions of dollars worth of mortgage-backed securities that lost value when the housing market collapsed. Bank of America Corp. lost nearly 6 percent. JPMorgan Chase & Co., Wells Fargo & Co. and Goldman Sachs each fell 3 percent or more.
The losses came after steep declines in European indexes. The Stoxx 600 Europe index fell 4.1 percent on Monday because of concerns that Europe's debt problems could slow growth around the world. The index fell another 1.4 percent Tuesday. U.S. markets were closed Monday for the Labor Day holiday.
The U.S. economy is also weak. A report Friday found that no jobs were added to the economy in August. It was the worst reading on the jobs market since September 2010.
The price of assets that appeared to be safer bets during a weak economy rose sharply. The yield on the 10-year Treasury note fell to 1.93 percent. On Monday the yield fell as low as 1.91 percent, the lowest yield on record since the Federal Reserve Bank of St. Louis began keeping daily records in 1962. Bond yields fall when demand for them increases.
Gold jumped $24, or 1 percent, to $1,901 an ounce. In a sign that investors expect the economy to slow, the price of oil fell sharply. Oil futures dropped $1.87, or 2 percent, to $84.61 a barrel.
A relatively strong report on U.S. service companies did little to stem the losses. The Institute for Supply Management said the service sector grew more than analysts had expected in August. The growth rate of that part of the economy, which employs nearly 90 percent of America's work force, fell the three previous months.