The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, briefly topped 30 for the first time since Sept. 1.
"Taking out that August low is definitely concerning," said John Caruso, senior market strategist at RJO Futures. "It may not happen in the near term, (but) definitely low prices are coming."
Financials closed down 3.4 percent to lead all S&P 500 sectors lower. Information technology and energy were the second and third greatest decliners, respectively.
"The fact that financials are leading it after positing good earnings is troubling," said JJ Kinahan, chief strategist at TD Ameritrade.
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The Dow transports closed down 1.6 percent after earlier falling more than 3 percent. Avis Budget led decliners.
Oil fell sharply to hit fresh lows amid the China stock sell-off and concerns about more oversupply from possible lifting of international sanctions within days that could increase Iranian oil exports. The weekly rig count showed a decline of 1, according to Baker Hughes.
Brent crude settled down 6.28 percent at $28.94 a barrel, its lowest in nearly 12 years. Brent lost 13.7 for the week, its worst weekly decline since 2008.
Dow futures briefly fell 400 points and the 10-year Treasury yield dipped below 2 percent after retail sales declined 0.1 percent in December. Ex-autos, retail sales also fell 0.1 percent.
The 10-year yield was near 2.03 percent and the 2-year yield around 0.84 percent around the U.S. stock market close.
"We suffered some real technical damage and the thing that worries me is this systemic lack of confidence. I still think the fundamentals are solid," said Brad McMillan, chief investment officer at Commonwealth Financial. "The U.S. economy is not going into a recession anytime soon."
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In economic news, the January Empire manufacturing index was minus 19.4.
Industrial production for December fell 0.4 percent. Capacity utilization was 76.5 percent.
The Producer Price Index fell 0.2 percent in December after rising 0.3 percent in November.
November U.S. business inventories fell 0.2 percent.
January U.S. Michigan preliminary Consumer Sentiment was 93.3.
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"What (the data) is saying is the U.S. economy in the fourth quarter is slowing and the data is in line with that expectation of that slowdown. However, the market's concerns of recession are much more elevated than they were a few days ago because of emerging markets, China and commodities," said Krishna Memani, chief investment officer at OppenheimerFunds.
"Because investors don't trust underlying data coming out of (emerging market) countries much, they are looking at market indicators as proxies," he said, noting he thinks concerns about emerging markets are overblown.
The iShares MSCI Emerging Markets ETF (EEM) closed nearly 4 percent lower.
Overseas, the Shanghai composite fell about 3.5 percent after Chinese loan data renewed concerns about the pace of economic slowdown. The People's Bank of China set the yuan mid-point fix at 6.5637, comparatively flat relative to Thursday's fix of 6.5616. The Shanghai composite is down more than 40 percent from its 52-week intraday high.
European stocks closed down more than 2.5 percent. The STOXX Europe 600 and German DAX are both down more than 20 percent from its 52-week intraday high, in bear market territory.
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The U.S. dollar index was down about 0.2 percent. The euro was at 1.09 and the yen at at 116.94 yen against the greenback.
"Simply put, we're not talking about a wall of worry right now. We're talking about a mountain," Larson said.
"It's not anything new. It's the continued persistence of global growth concerns," he said.
White House spokesman Josh Earnest said Friday the market action is "closely watched at the Treasury Department" and that financial markets around the world are under watch. The White House does not usually comment on market moves.
New York Federal Reserve President William Dudley said that future rate hikes depend on data and that rates are set to continue on gradual upward path. He added that overseas economies pose risk to the United States and there's little change in outlook since the Fed meeting.
Core inflation is quite stable despite lower energy, Dudley said, noting 2016 growth is to be slightly above 2 percent.
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San Francisco Federal Reserve Bank President John Williams told Reuters Friday the stock market's swoon does not change the economic outlook and is merely market participants trying to make sense of global developments,
"If the Fed is not going to be underpinning the market, the valuations have to fall into line with fundamentals," said Quincy Krosby, market strategist at Prudential Financial.
"This (sell-off) should not be a surprise to the market. This has been telegraphed to the market for some time. ... This is not abnormal for four years of no pullbacks," she said.
The Dow Jones industrial average closed down 390.97 points, or 2.39 percent, at 15,988.08, with Intel leading all constituents lower.
The Dow lost 2.19 percent for the week. DuPont was the greatest decliner on the week, while Exxon Mobil was the best performer. The index is down 8.25 percent for the year so far.
The S&P 500 closed down 41.55 points, or 2.16 percent, at 1,880.29, with financials leading all 10 sectors lower.
The index fell 2.17 percent for the week, with materials the worst performer and utilities the only gainer. The S&P is down 8 percent for the year so far.
The Nasdaq composite closed down 126.59 points, or 2.74 percent, to 4,488.42.
The Nasdaq lost 3.34 percent for the week, with Apple up 0.18 percent for the week but the iShares Nasdaq Biotechnology ETF (IBB) down nearly 6 percent. The index is down 10.36 percent year-to-date.
All three major U.S. averages are more than 10 percent below their 52-week intraday highs, in correction territory.
About five stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of nearly 1.5 billion and a composite volume of almost 5.5 billion in the close.
High-frequency trading accounted for 49 percent of January's daily trading volume of about 8.97 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.
Gold futures for February delivery settled up $17.10 at $1,090.70 an ounce.