The Dow Jones industrial average fell more than 220 points, giving up almost a third of what had been a 745-point advance since Jan. 1, the best start to a year in the US market since 1998.
The sell-off, which spread west from Europe, also interrupted a period of unusual calm on Wall Street. Before Tuesday, the Dow had not fallen 100 points for 45 straight trading sessions, the longest streak since 2006.
"When things go straight up and don't ever correct or have some sort of normal pullback, as an investor, that makes me nervous," said Ed Hyland, a global investment specialist with J.P. Morgan Private Bank.
The gradual rally had been powered by optimism about the U.S. economic recovery. But investors realized that Greece's debt problems, Europe's economic problems and Israel's Iran problems were still very much their problems, too.
Stocks fell sharply from the opening bell and never mounted a serious comeback. All but two of the 30 stocks in the Dow were lower, and Procter & Gamble and Kraft Foods managed only a few pennies of gains.
Just before 3:30 p.m. (2030 GMT), the Dow was down 215 points at 12,748. It was only last week that the Dow closed above 13,000 for the first time since May 2008, four months before the worst of the financial crisis.
The Standard & Poor's 500 index was down 22 points at 1,342. The Nasdaq composite index was down 44 points at 2,907.
All 10 industry groups in the S&P 500 declined. Bank stocks, which typically take a hit when there is any reason to worry about Greece, led the declines, followed by industrial and materials companies, which depend on strength in the world economy.
Caterpillar, which makes heavy equipment and depends heavily on China for profits, fell 4 percent, the worst of the Dow 30. China revised its projection for economic growth on Monday to 7.5 percent this year, down from 8 percent.
The S&P 500 fell 23 points, or 1.7 percent, on its way to breaking its own streak of calm. The S&P has not declined 1 percent or more for 45 straight trading days, also the longest streak since 2006. That year, the S&P put together 94 in a row.
Last year, sell-offs like this were much more common. The S&P fell by at least 1 percent on 48 trading days, roughly one in every five. During the depths of the financial crisis in the last four months of 2008, it happened roughly one in every three days.
Stocks fell more than 3 percent Tuesday in Germany, Spain and France, and 1.9 percent in Britain. Greece stepped up pressure on private investors to swap their Greek government bonds for replacements with a lower face value and interest rate.
Major banks and investment funds have signed on for the swap, but it remains unclear whether hedge funds, which had already bought the bonds at a steep discount and may profit from bond insurance payouts if Greece defaults, will agree. The deadline is Thursday.
The swap is vital for Greece to cut its debt and get a bailout of ?130 billion, or $172 billion, from other countries and the International Monetary Fund. Without the bailout, Greece could default on its debt later this month and rattle markets around the world.
Bill Stone, chief investment strategist for PNC Wealth Management, called Tuesday's decline "fairly rational," considering how much the market has climbed and the economic worries in Greece and the rest of Europe.
"You need the pullback to give people opportunities to want to get involved again," Stone said.
Oil prices slipped $1.56 to $105.16 per barrel on the New York Mercantile Exchange. New York crude has risen from $96 last month amid fears of a disruption in global oil supplies driven by the potential for military conflict with Iran.
The price of gold fell $32 per ounce, or 2.1 percent, to $1,672 per ounce. Silver, platinum and copper all fell more than 2 percent because of concerns about Europe and weaker economic demand in China.
"Global growth fears now are hitting home, and we're seeing selling across the board," said Matt Zeman, a market analyst for Kingsview Financial.
Yields on US government debt also fell as investors moved their money into what they perceive to be a safer asset. The yield on the benchmark 10-year Treasury note fell to 1.95 percent from 2.01 percent late Monday. Bond yields fall when their prices rise.
Among stocks making big moves:
- Weight loss company Nutrisystem Inc. fell 10 percent after it reported a bigger-than-expected fourth-quarter loss and a disappointing outlook.
- General Motors fell 5.4 percent after saying it will pay ?304 million, or $402 million, for a 7 percent stake in Peugeot, which will make it the French carmaker's second-largest shareholder after the Peugeot family.
- VeriFone Systems Inc. rose 6.5 percent after the maker of electronic payment systems predicted a bigger-than-expected 2012 profit.