Stark's departure rattled traders because the US economy is "teetering on the verge of recession", and the outcome in Europe might determine which way it goes, said Andrew Goldberg, market strategist with JP Morgan Funds.

He said traders are latching onto any piece of news that might signal a positive or negative outcome in Europe.

Banks in Europe hold bonds issued by nations deep in debt, including Greece, Ireland and Portugal, but investors don't know exactly how much each bank holds from each country.

The value of the bonds would quickly diminish if one of those nations defaults. Banks might stop lending to each other because of fears that some would fail.

Stark's departure was seen as "a bit of news that contributes to a worse outcome, so if you're thinking of being a seller, today that's what you are", Goldberg said.

The central bank's troubles raise the stakes for a meeting this weekend in of financial leaders from the world's most developed economies.

High volatility returned to the market Friday. One measure known as the VIX, which measures investors' fears, increased 18 percent.

Friday's plunge extends a tough quarter for the stock market. The S&P 500 is down 13 percent since the third quarter started in July. However, it has recovered almost 4 percent since its lowest close this year Aug 8.

Analysts say stocks are likely to fall further as the crisis in Europe goes on. A shrinking European economy would hurt the US because roughly a quarter of American companies' revenue comes from Europe, said Sam Stovall, chief investment strategist for S&P in New York.

"Maybe the market has already priced in a very, very soft spot, but it has not priced in quicksand - it has not priced in a recession," he said.

Forrest, of Fort Pitt Capital, said the sell-off had brought some stock prices "within buying range". She said traders have few other places to invest, with Treasury yields near record lows and currency markets gyrating because of fears about the euro.

Markets in Europe also fell sharply. France's CAC 40 and Germany's Dax fell about 4 percent. London's FTSE lost more than 2 percent.

In the US, McDonald's Corp stock fell 4 percent because of disappointing revenue. McDonald's said that revenue at restaurants open at least 13 months rose 3.5 percent in August. Analysts expected 4.9 percent.

Bank of America Corp fell 3 percent after The Wall Street Journal reported that it might cut up to 14 percent of its work force as part of a massive restructuring. Bank of America already has cut at least 6,000 jobs this year. CEO Brian Moynihan announced a management shake-up this week.

VeriSign Inc, which manages Internet domain names, fell 15 percent after its chief financial officer resigned. Specialty glass maker Corning Inc fell 6 percent a day after it said it expected to sell less glass for LCD TVs than originally forecast.