The Dow lost 424 points, or 1.8 per cent, to 23,533, bringing its weekly decline to 1,400 points.
China vowed on Thursday that it would fight a potential trade war "until the end". "It also demonstrated that the global community is concerned about the recklessness and danger of USA policies and actions".
The S&P 500 fell 55 points, or 2.1 percent, to 2,588.
The Dow is on pace for one of its worst-performing months since 2015 as investors grow anxious that Trump's trade policies and their fallout could upset a robust global economy. The SPDR S&P Bank ETF (KBE) fell 3.7 percent, while Citigroup, J.P. Morgan Chase and Bank of America all closed lower.
The Dow is down almost 5 percent in 2018. That was, however, before the Trump administration imposed further tariffs on up to US$60 billion of Chinese imports, which in turn saw China respond with $3bn of its own tariffs on 128 U.S. products. The Nasdaq composite pulled back 2.3 percent to close at 7,166.68. "The combination of fiscal stimulus and corporate profits will overwhelm tariffs".
The CBOE Volatility Index, the most widely followed barometer of expected near-term volatility in the S&P 500, finished up 5.48 points at 23.34, its highest close since February 13. Facebook's deepening crisis and the Federal Reserve raising rates Wednesday rattled shaky investors. The Dow ended Thursday down 722 points, a 2.9 percent drop, and briefly fell into correction territory.
"Global equity market sentiment remains downbeat as US tariffs aimed at China have flared tensions between the two nations and prodded concerns of a broader escalation", said Carl Campus, economist at BMO Capital Markets in a note.More news: Stranger Things stars reportedly land big pay raises
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Such reactions do not yet amount to an all-out trade war, but they do provide an early warning about how a delicate situation might easily unravel, especially with an impulsive and inexperienced US President now increasingly following his own instincts over key issues such as trade and national security. Officials in China detailed a plan to retaliate to Trump's aluminum and steel tariffs by imposing their own tariffs on about $3 billion worth of imports of United States goods.
The Dow was down 11.6 percent since its January 26 high, and hit its lowest close since confirming a correction in February.
As for how the ASX would fare if a trade war erupted, CMC Markets' Michael McCarthy told the ABC: "Australia's resource-heavy share market is likely to suffer more than most other share markets".
Analysts also pointed to other factors behind the big drop, including a pullback in 10-year US Treasury yields that sparked a selloff in financial shares.
United States stock futures were in negative territory.
Mr Trump's decision to levy a 25 percent tariff on imported steel and 10 percent on overseas aluminium left world leaders scrambling to secure exemptions to prevent their economies from being hit. Among technology companies, Microsoft fell $2.69, or 2.9 percent, to $89.79 and Alphabet, Google's parent company, fell $40.85, or 3.7 percent, to $1,053.15.