The tech-heavy Nasdaq composite lost 48.23 points (2.13 percent) to 2,215.38 while the broad-market Standard & Poor's 500 index was down 29.54 points (2.25 percent) at 1,285.94.
JPMorgan Chase & Co. said it had teamed up with the New York Fed to help provide funds to Bear Stearns which has seen its finances ravaged by the US housing slump and a related credit crunch sweeping Wall Street.
The market gyrations occurred amid signs that the credit squeeze was deepening as Bear Stearns chief executive Alan Schwartz said the bank's liquidity position had "signficantly deteriorated" in the past 24 hours.
The bank's shares plunged 40 percent to 23.00 dol