Triggered by new data on the economy suggesting it continues to surge, the Dow lost as many as 217 points, or 3.2 percent. It recovered some of that, however, to close at 6,740.59, off 140.11.
That was the Dow's eighth-biggest point drop ever, but at 2.04 percent, the selloff was nowhere near one of the biggest percentage declines. Just two weeks ago, on March 13, the average plunged 160.48 points.
The average's worst-ever performance was a 508-point decline on Oct. 19, 1987 -- Black Monday -- when it tumbled nearly 23 percent.
The market fell today on reports that the sales of existing homes recorded their largest gain in more than a decade in February, new claims for unemployment insurance declined last week and help-wanted advertising grew last month.
Soaring Treasury bond yields also raised traders' concerns and prompted some investors to move money from stocks to bonds.
The drop came just two days after the Fed raised interest rates for the first time in more than two years in a bid to slow the economy before inflation again becomes a threat. The strong economic data today brought home the point that more increases are likely.
The yield on the 30-year Treasury bond blasted past 7 percent to 7.08 percent, a psychologically important barrier.
At the worst of today's selloff, Wall Street's best-known indicator was down more than 420 points, or nearly 6 percent, from the March 11 record high of 7,085.16. It is still 4.53 percent above where it began the year.
The sell-off may also have been intensified by the fact that many traders went home early for the three-day weekend and volume was light. The stock market is closed on Good Friday.
Stock market analysts said today's trading was also affected by technical factors including end-of-the-quarter portfolio adjustments.
"They wanted to go away with minimal exposure," said William Lefevre, senior market analyst at Ehrenkrantz King Nussbaum, who called the market's drop an overreaction.
Financial sector stocks, which can be hurt by rising rates, were among the big losers, but analysts noted that declines came across the board.
Declining issues led advancers by more than 3 to 1 on the New York Stock Exchange, with 633 up, 2,025 down and 680 unchanged.
NYSE volume totaled 475.93 million shares vs. 487.33 million yesterday. The NYSE's composite index fell 7.94 to 407.43.
The Nasdaq composite index fell 19.58 to 1,249.50, and the American Stock Exchange composite index dropped 5.17 to 577.90. The S&P 500 stock index lost 16.62 points to end the day at 773.88.
Meanwhile, the dollar fell against major currencies as U.S. bonds and stocks plunged, raising concern global investors will cut their stakes in U.S. markets and sell dollars, according to Bloomberg News. In late trading in New York, the dollar was quoted at 123.68 yen, down from 124.04 yen yesterday.
The U.S. currency began its slide in Asian trading after comments by Deputy Treasury Secretary Lawrence Summers increased concern that Clinton administration doesn't want the dollar to rise much further.
Those remarks, together with the declines in stocks and bonds, were "absolutely lethal for the dollar," said Albert Soria, head of foreign exchange at Generale Bank. "We may indeed have a reversal" of the U.S. currency's recent rally.