"You may start seeing some crazier-than-usual moves at the end of the day," said JJ Kinahan, chief strategist at TD Ameritrade, adding that Friday's move lower also shows an allocation shift from stocks to bonds.
Treasury yields extended Thursday's decline, with 10-year note yields trading around 2.13 percent, while two-year yield held near 67 percent.
"We opened down in concert with the rest of the world," said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
The pan-European Stoxx 600 index closed down 1.8 percent lower as investors digested the Fed's decision, while the German DAX shed 3 percent, putting it just shy of bear marker territory. About midway through the London trading session, a "fat finger" incident caused the FTSE 100 index to briefly fall 2 percent before closing down about 1 percent.
The Federal Reserve held its key federal funds rate unchanged after the conclusion of its two-day policy meeting Thursday. September was supposed to be the month the U.S. central bank finally came off its zero interest rate policy, but instead it opted to hold steady for at least one more month.
"There's just a lot of uncertainty right now," said Scott Brown, chief economist at Raymond James, adding that the timing of a Fed rate hike shouldn't matter, "but it does for some reason."
During a press conference after the announcement, Federal Reserve Chair Janet Yellen stressed the path of the Fed's first rate hike in nearly a decade is more important than its timing.
"The only sliver of hope, post that announcement she left open the door that they could raise rates at a non-press conference meeting," Hogan said.
Other analysts thought the Fed should not have raised rates, given the global economic environment. Fed funds futures had indicated only about 20 to 30 percent of a chance the Fed would hike in September.
"The people betting real money never expected the Fed to do anything yesterday," said Nick Raich, CEO of The Earnings Scout. "Ultimately, the Fed did the right thing by holding."
He noted there were some who thought "if the Fed did not hike, oh my goodness, what do they know, what's so bad in the economy that we don't know."
The central bank added to recent Wall Street concerns about the impact of sluggish global growth. In its statement, the Fed said that "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term."
China's surprise devaluation of the yuan in mid-August raised concerns about further slowdown in the world's second-largest economy and was a factor behind the recent correction in U.S. stocks.
The Fed "said that the U.S. economy is doing OK but they are concerned the global economic turmoil, weakness in China, could have a negative impact on the U.S. economy," said Stuart Hoffman, chief economist at PNC.
Read MoreChart experts fear Fed whiff means back to lows
"Clearly they've given up on any acceleration in the U.S. economy in the second half of this year compared to the first half this year," he said.
The U.S. dollar jumped to trade nearly 1 percent higher against major world currencies, with the euro falling sharply to below $1.13 and the yen at 119.9 yen against the greenback. The dollar reversed losses against the Mexican Peso to trade about 0.3 percent higher.
"The Fed didn't pass on tightening because the U.S. economy wasn't doing well. It was because the overseas economy wasn't doing well," said Krishna Memani, chief investment officer at Oppenheimer Funds.
"The question is whether that was the right way to go about that. I do think the Fed should focus first on the U.S., not the global (economy)," said Jason Leinwand, managing director at Riverside Risk Advisors.
Odds have also risen that the Fed will now not hike rates until 2016, and RBS says the markets are currently pricing the first full rate rise for March but odds for December were still above 60 percent.
In Asia, the Shanghai Composite index closed up 0.42 percent, while Japan's Nikkei finished 1.96 percent lower.
As of 2:57 p.m., the iShares MSCI Emerging Markets ETF (EEM) traded about 1.5 percent lower, after a 2 percent intraday spike and plunge Thursday.
"It's certainly this fear factor which might intensify over the next several weeks (with the continued) Fed debate over interest rates," said Peter Cardillo, chief market economist at Rockwell Global Capital.
Gold futures settled up $20.80 at $1,137.80 an ounce.
Crude oil futures for October delivery settled down $2.22, or 4.73 percent, at $44.68 a barrel.
No significant earnings were due Friday. On the data front, leading indicators for August rose 0.1 percent, below the expected 0.2 percent gain.
The Dow Jones industrial average closed down 289.95 points, or 1.74 percent, at 16,384.79, with Merck leading all blue chips lower. UnitedHealth was the greatest advancer on the week and JPMorgan Chase the greatest laggard.
The S&P 500 closed down 32.12 points, or 1.61 percent, at 1,958.08, with energy leading all 10 sectors lower. Utilities was the best performer on the week and materials the greatest decliner.
The Nasdaq Composite closed down 66.72 points, or 1.36 percent, at 4,827.23.
The CBOE Volatility index (VIX) considered the best gauge of fear in the market, held above 22.5.
Read MoreEarly movers: ADBE, LQ, AET, IGT, AAPL, BAC, CVC, FB, TXN, QCOM & more
About two stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of nearly 2.6 billion and a composite volume of almost 6 billion in the close.
Cumulative volume topped 11 billion shares, the second-highest volume day of the year. The only other day with greater cumulative volume was on Aug. 24, when the Dow briefly lost more than 1,000 points.
High-frequency trading accounted for 49 percent of this month's trading volume of about 6.9 billion shares, according to TABB Group. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders.
On tap this week:
1:30 p.m.: San Francisco Fed President John Williams on the economic outlook
3:30 p.m.: St. Louis Fed President James Bullard on the economy and monetary policy
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