The Standard & Poor's 500-stock index dropped by 1.16% to 2,689.86, while the NASDAQ plunged 0.5% to close at 7,396.59.
Spain's bond-yield spread with Germany also went to its widest this year at almost 1.35 percentage points ES10YT=RR and Madrid's IBEX bourse .IBEX closed down 2.5 percent.
The head of Italy's central bank, speaking amid political turmoil, said any move to weaken the country's public finances could undermine confidence and years of valuable reforms.
In Italy, the country's president, Sergio Mattarella, frustrated a bid by the Five Star Movement and Northern League to form a coalition government.
The Dow Jones index jumped 306 points, or 1.3 per cent to 24,668 - a strong gain, but not quite enough to erase yesterday's sell-off.
Banks and technology companies led the way lower on Wall Street.
European shares fell on Thursday as trade war concerns weighed and Deutsche Bank tumbled to a record low after a report the U.S. Fed previous year deemed its U.S. operations as troubled.
In Spain, a political vacuum looks set to be averted as Pedro Sanchez was nearly certain to become Spain's new Prime Minister after his socialist party secured enough votes to topple Mariano Rajoy in a confidence vote scheduled on Friday over a corruption case. Investors fear the move will trigger new elections later this year that might give a more explicitly anti-Europe mandate to the two populist parties.
Markets are anxious that a second national election will be called later this week for September-October at which the two populist parties who made the biggest gains at the most recent elections, could sweep to power.
"Pending better visibility on the new government's actions, Italian assets may continue to price in some policy uncertainty", Matteo Ramenghi, chief investment officer UBS WM Italy, said in a note.
The price of Brent crude rose 2.7 per cent $US77.43 dollars a barrel. The Financial Select Sector SPDR ETF, which tracks a broad basket of US bank stocks, fell 3.3%.
The euro has also recovered somewhat on Wednesday, with the single currency - which lost around 0.85% on Tuesday - gaining by a similar amount against the dollar during the morning hours in Europe.
The Wall Street Journal reported that the Fed a year ago designated its US operations to be in "troubled condition", one of the lowest designations employed by the central bank. Germany's DAX lost 1.1 percent.
Oil struggled under pressure from expectations that Saudi Arabia and Russian Federation would pump more oil to counter potential supply shortfalls from Venezuela and Iran, even as U.S. output has surged in recent years.
U.S. crude oil fell 25 cents to $66.50 per barrel in electronic trading on the New York Mercantile Exchange.
The shock waves also reached Asian markets as Japan's Nikkei 225 dropped 122.66 points or 0.55%, closing at 22,358.43 on May 29. The Hang Seng in Hong Kong slipped 1.5 percent to 30,034.07 and the Shanghai Composite index fell 1.6 percent to 3,072.76.