The broad Standard & Poor's 500 stock index dropped more than 6 percent.

A bleak September retail sales report set the tone early, underscoring the severity of the squeeze on consumers faced with sliding home values, a rocky stock market and tight credit.

Shares of retailers were bruised by the data, including Dow components Wal-Mart Stores and Home Depot. Wal-Mart fell 4.4 percent to $52.06, while Home Depot was down 3.8 percent at $20.27.

Caterpillar Inc gave up 9.2 percent at $43.11. Exxon Mobil was among the biggest drags on the Dow, falling more than 8 percent as the price of U.S. crude for November delivery fell 5 percent to $74.71 a barrel.

"It looks like everything that's economically sensitive is getting hit pretty good," said Scott Vergin, portfolio manager at Thrivent Financial in Minneapolis, Minnesota.

"The thing is how much has the credit crunch already impacted the real economy?" added Vergin. "That's what everyone's really worried about."

The Dow Jones industrial average slumped 509.11 points, or 5.47 percent, to 8,801.88. The Standard & Poor's 500 Index shed 65.87 points, or 6.60 percent, to 932.14. The Nasdaq Composite Index lost 101.75 points, or 5.72 percent, to 1,677.26.

Speaking in New York, Bernanke said the economy faces a significant threat from the credit crisis, adding to investors' recession fears.

Strong results from Coca-Cola, the world's largest soft-drinks maker, helped it buck the trend after it posted quarterly profit that beat Wall Street's expectations. Shares of Coke were up 4.1 percent at $45.54.

Intel Corp also posted better-than-expected results after the closing bell on Tuesday. After pushing higher earlier, shares of the computer chip maker retreated 1.4 percent to $15.71.

The slide in oil prices helped airline stocks. The Amex Airline Index rose 0.5 percent. Delta Airlines was up 5.3 percent at $7.74. The company earlier reporting a wider-than-expected quarterly loss.

But oil's drop hurt Exxon, which fell 8.7 percent to $66.14, while Chevron shed 7.7 percent to $63.33.

Financial shares fell after an influential bank analyst at Oppenheimer & Co, said U.S. banks were not out of the woods despite the government's plan to stabilize key players by investing $250 billion.

Shares of State Street Corp , one of the world's biggest institutional asset managers, tumbled more than 12 percent to $49.78. The company said it moved forward the release of its results and received some of the $250 billion the U.S. Treasury is investing.