US President Donald Trump appeared to be back in fighting mode after the weekend show of comity, saying he would "happily" sign a "fair" deal with China but was also ready to take a harder line.
The Dow Jones Industrial Average lost 799.36 points, or 3.1%.
The sharp drop in yields hurt banks because it makes it harder to earn money from lending. Citigroup fell 4.5 percent to $62.26.
The S&P 500 index slid 90.31 points, or 3.2 percent, to 2,700.06. The Russell 2000 index of smaller-company stocks gave up 51 points, or 3.3 percent, to 1,497. The tech-heavy NASDAQ ended the day 3.8 percent or 283 points lower at 7,158.
Stocks are turning sharply lower on Wall Street as trading turns jittery again, erasing 500 points from the Dow Jones Industrial Average.
Wall Street fell more than 2% on Tuesday, led by bank stocks as a flattening US Treasury yield curve set off warning lights about slowing growth and on fading hopes of a speedy resolution to the US-China trade spat.
Last week, stocks jumped when the Federal Reserve's chairman indicated the central bank could slow the pace of interest rate increases.
Alarm bells rang in bond markets after the US Treasury yield inverted for the first time in more than a decade, suggesting that a recession could be on its way. Advanced Micro Devices dropped 9.4 per cent to $21.49, while Micron Technology lost 6.4 per cent to $37.47. The Nasdaq fell 197 points, or 2.7 percent, to 7,244.
The jitters helped drive demand for government bonds Tuesday, pushing prices higher.
The bond market signaled its concerns as the gap between two-year and 10-year Treasurys reached its narrowest difference since 2007.
The sell-off came ahead of Wednesday's closure of USA stock and bond markets in observance of a national day of mourning for former President George H.W. Bush.
In other stocks, utilities software developer Gentrack, which has extensive operations in the United Kingdom and Europe, led the market lower, down 4 per cent at $5.52 in light trading, continuing its weakness since acknowledging concerns about its growth outlook.
The S&P 500 lost 61 points, or 2.2 percent, to 2,729.
Big losses for Boeing and Caterpillar, major exporters which would stand to lose much if trade tensions persist, weighed on the Dow.
"People think there is not "substance" behind Trumps tweets about tariffs so the markets are giving back the gains from before the G20 meeting", Michael Matousek, head trader at U.S. Global Investors, told ABC News.
Technology companies, banks and industrial stocks accounted for much of the sell-off.
Apple lost 4.4 percent to $176.69 after the consumer electronics giant was downgraded by HSBC analysts, citing the possibility that iPhone volume and value growth may moderate due to a saturated mobile phone market. Seoul's Kospi shed 0.6 percent to 2,102.17 and benchmarks in Taiwan, New Zealand and Southeast Asia also declined.
The Dow Jones Industrial Average fell 211 points, or 0.8 percent, to 25,611.
The Nasdaq composite lost 240 points, or 3.2 percent, to 7,201.
Asian stocks sank Wednesday after Wall Street plunged amid confusion about what Washington and Beijing agreed to in a tariff cease-fire.
Toronto-Dominion Bank lost 1.4 per cent, while Bank of Nova Scotia dipped 1.6 per cent.
Dollar General sank 5.6 percent after reporting weak results.
The S&P 500 index lost 8 points, or 0.3 percent, to 2,782.