There are concerns that the drop in share prices could be severe

There are concerns that higher rates will hit corporate profits and takeover deals, and dent consumer spending.

European markets were also jittery, with London's share index closing down for a fourth day and ending at its lowest level since the middle of March.

Analysts have warned that markets could remain volatile for a number of weeks.

"I think you've got bargain hunters out there for sure and I think you've got some people who are still scared," said Randy Frederic of Charles Schwab & Co.

"We're seeing the convergence of a whole host of sort of unrelated or only slightly related issues," he explained.

Share fall

By the close of trading in New York, the Dow Jones Industrial Average of leading shares was 208.1 points, or 1.5%, lower at 13,265.47.

Since Monday the index has lost 4.2%, its worst weekly decline in almost five years.

The wider measure of the US stock market, the S&P 500, ended down 1.6%, while the Nasdaq index, which largely tracks technology stocks, was 1.4% lower.

The stock market as a whole may be set for some dismal days Robert Peston BBC Business Editor Read Robert's blog

Earlier, the FTSE 100 index of leading shares on the London market had closed 36 points, or 0.6%, lower at 6215.20. France's Cac-40 index of leading shares and Germany's Dax also declined.

In Asia, the Wall Street slump on Thursday led to Japan's Nikkei closing down 418.28 points, or 2.4%, at 17,283.81, while Hong Kong's index ended 2.7% lower.

Credit crunch

The main underlying problem is that many investors are worried about an impending credit crunch.

In past years, financial markets, companies and consumers have all benefited from low interest rates and easy access to money, helping fuel a boom in spending, house price inflation and corporate takeovers.