The Dow Jones Industrial Average ended down 572.26 points (2.34 per cent) at 23,932.76 after sinking more than three per cent earlier.
Trump late Thursday threatened to slap US$100 billion (RM400 billion) more in tariffs on Chinese imports, while Beijing said it was fully prepared to respond with a "fierce counter strike".
While a 10-percent decline from all-time highs in a major stock index is a correction, a 20-percent drop constitutes a bear market. The S&P 500 index dropped 53 points, or 2%, to 2,610, with all 11 main sectors trading in negative territory.
This story is developing and will be updated... White House officials, including top economic adviser Larry Kudlow, have sought to ease Wall Street's fears of a trade war.
"The optimistic case is that the higher stakes will encourage the United States and China to push harder for an agreement so that the tariffs can be avoided or at least watered down", Capital Economics' Julian Evans-Pritchard wrote in a research note Friday. The VIX, a measure of market volatility, spiked 12 percent.
The earlier tariff threats roiled financial markets but stocks had rebounded Thursday on investor hopes that the parties would find a diplomatic solution.
UCL: Liverpool charged by UEFA for pre-match disturbance against City
And they may have to do so without leading goalscorer Mo Salah after the player was substituted with a groin strain. Yet the Irishman felt Guardiola's men looked overwhelmed in the hothouse atmosphere of Anfield.
Investors were unnerved by President Donald Trump's threats of tariffs on an additional US$100 billion in Chinese imports as the United States president hit out at China's "unfair retaliation" to a prior Trump announcement of US$50 billion in tariffs on Chinese goods. Beijing fired back hours later by threatening tariffs on $50 billion worth of USA goods, including cars, planes and soybeans.
China Commerce Ministry spokesman Gao Feng said the two countries have not recently held any negotiations, which are impossible under current conditions. Treasury Secretary Steven Mnuchin added to the anxiety by saying there's a "level of risk" the spat could worsen.
The sell-off accelerated in the final two hours of trading after Fed Chief Jerome Powell indicated the central bank would continue hiking rates this year.
Wages grew 2.7 percent in March compared with a year earlier, in line with expectations.
Kudlow, speaking to reporters shortly after the markets opened, said, "Now, we're not running a trade war". In February, an unexpected jump in wage growth set off inflation alarm bells and caused stocks to plunge. While the report was well below forecasts, it may be taken as a positive if it results in the Federal Reserve being less aggressive in raising interest rates.
With administration officials sounding conciliatory one day and more hostile the next and the president always quick to fire off another tweet, investors simply don't know what the US wants to achieve, said Katie Nixon, chief investment officer for Northern Trust Wealth Management. The yield on the 10-year Treasury fell to 2.78 percent from 2.83 percent. "The statement added that China "doesn't want" a trade war, but is not afraid to fight one".