The Dow Jones fell almost 600 points after hours after the head of the Federal Reserve, Jerome Powell, announced the US central bank was prepared to step up the pace and size of interest rate rises to tackle stubbornly high inflation.
In the wake of the comments, the dollar strengthened to its highest level in two months against other major currencies, with sterling down 1.4% on the day to $1.186, a two-month low.
The announcement followed unexpectedly high US price growth last month, denting confidence in the bank's campaign to lower inflation.
Powell told a Senate hearing that if data indicated that faster tightening was necessary, the bank would be prepared to increase the pace of rate hikes.
Traders promptly increased their bets on a bumper rate rise at the Fed’s next policy meeting, with markets now pricing the odds of a 50-basis point increase as roughly even with that of a 25-basis point rise.
The Dow ended the session at 32,856.46, off 574.98.