About 20 minutes into trading, the Dow Jones Industrial Average was down about 400 points, or 1.5 percent, at 25,879.21.
The broad-based S&P 500 slid 1.5 percent to 2,882.33, while the tech-rich Nasdaq Composite Index dropped 1.7 percent to 7,877.59.
The sell-off came shortly after the yield on the 10-year US Treasury note briefly slid below the yield on the two-year bond, a dynamic that is often seen as a harbinger of recession.
The decline followed the latest stream of weak economic data from overseas, including the weakest Chinese factory output data in 17 years and official German data that showed negative growth in the second quarter.
The gloomy economic reports have fueled expectations that the leading central banks will undertake new stimulus measures. The Federal Reserve cut interest rates last month for the first time in more than a decade and is expected to make additional cuts in the months ahead.
"The so-called yield inversion signaled that the US economy could be a little more than a year away from recession," said a note from Joe Manimbo, senior market analyst at Western Union Business Solutions.
"Sinking yields are the bond market's way of pressuring the Fed to step on the monetary gas pedal and cut interest rates. Others worry that central bankers may be low on tools to ward off recession given that policy settings are already accommodative."