Canada's main stock index also took it on the chin, sliding more than 250 points, down 4 per cent over the past week, in a broad-based decline that included drops in every sector.
Fears about inflation were stoked by the stronger-than-anticipated jobs report for January, which came out Friday morning.
The Dow had its worst decline since June 2016, while the broader Standard & Poor's 500 index had its biggest one-day percentage drop since September 2016.
USA stocks closed sharply lower after an upbeat jobs report sent interest rates up.
All 11 S&P industry groups fell, with energy (-4.1%) pacing the retreat following disappointing Q4 earnings reports from Exxon Mobil and Chevron; also, U.S. WTI crude oil futures slipped 0.8% to $65.30/bbl.
Apple fell 2.9 percent as investors focused on the company's muted forecast rather than strong iPhone prices and its cash plans.
The downturn also follows a long period of unprecedented calm in the market. The S&P is down nearly 4 percent since hitting a record high a week ago.
The Dow Jones Industrial Average tumbled 500 points in the biggest plunge since Donald Trump's election, as a rout in the bond market spilled into equities.
Another comparison: When the Dow plunged a record 22.6 percent on October 19, 1987, it was a drop of 508 points because the average was so much lower at that time.
Declining issues outnumbered advancing ones on the NYSE by a 7.70-to-1 ratio; on Nasdaq, a 3.90-to-1 ratio favoured decliners.More news: Modicare will need up to Rs12,000 crore for implementation, says JP Nadda
Topix index fell 0.3 percent, Hong Kong's Hang Seng Index dropped 0.1 percent, the Kospi index declined 1.7 percent, Australia's S&P/ASX 200 Index rose 0.5 percent.
The optimism helped lift stock markets ever higher, extending the boom into its ninth year.
Paul Nolte, portfolio manager at Amundi Pioneer Asset Management in Boston, said: "It's all about the bond market, the bond market is calling the tune for stocks and has been all week".
The increase in rates has been driven by the prospect of stronger economic growth, and higher inflation, in the USA and overseas.
"It's all about the bond market, the bond market is calling the tune for stocks and has been all week".
The yield on the 10-year Treasury note - a widely used gauge for overall interest rates - rose to more than 2.8 per cent, the highest level since early 2014. The Fed started raising rates two years ago.
"It's a legitimate concern, when inflation spikes up a little bit, that people should evaluate how is this going to affect profits and how is this going to affect the Fed", said Mr Jonathan Golub, chief U.S. equity strategist at Credit Suisse.
The index is still up more than 3 percent since the year began.
"The bond market sold off and the expectation is three maybe four rate hikes this year in light of the jobs report", said Nolte.
USA hiring picked up in January and wages rose at the fastest annual pace since the recession ended, as the economy's steady move toward full employment extended into 2018.