US Democrats also said on Thursday that a $25bn financial bailout for the car industry had not been agreed and pressed the firms for more details on how they planned to restructure.
The Dow Jones Industrial Average closed down by more than 400 points, or 5.3 per cent on Thursday, while the Standard & Poor's index fell six per cent.
Martin Slaney, the head of derivatives at GFT Global Markets, said it was "one car crash after another for the markets right now".
"The risk of global economic recession is deepening by the day. The prospect of "the Great Depression 2" is now a genuine one and is plain scaring investors," he said.
"The domino which is pushing all of this forward is the enormous level of debt compared to incomes all around the world"
Steven Keen, economics professor in Australia
The White House reacted swiftly to the unemployment news on Thursday, saying George Bush, the US president, would sign a new extension of unemployment benefits after it was approved in congress on Thursday.
"The president believes it would be appropriate to further extend unemployment benefits, and he would sign the legislation now pending in Congress," spokeswoman Dana Perino said.
Last month, the US unemployment rate jumped to a 14-year high of 6.5 per cent, with 10.1 million people looking for work, an increase of 2.8 million over the past year.
The US labour department had said on Wednesday that its consumer price index (CPI) fell by one per cent in October, the biggest drop since the department began releasing data in February 1947 and worse than analysts' expectations.
But despite the falling prices of many items, from houses to oil and stocks, very few people are buying.
Even some of the world's most established financial firms are finding that they are not immune from the global economic crisis.
Citigroup, a major financial firm based in the US, is considering selling part of the company or merging with another firm in the face of severe losses to its stock price, a source said.
But the company said it has a "very strong capital and liquidity position", while Saudi Prince Alwaleed bin Talal, a key investor in the bank, said on Thursday that he plans to increase his stake.
The retail sector has also been badly hit, with high street stores slashing prices in an attempt to entice shoppers over the holiday season.
|New unemployment claims in the US have hit a 16-year high [GALLO/GETTY]
"The domino which is pushing all of this forward is the enormous level of debt compared to incomes all around the world," Steve Keen, associate professor of economics at University of Western Sydney, told Al Jazeera.
"That debt is simply beyond the level where the physical economy can service it, and that is ultimately what is driving down prices and economic performance."
While falling prices across the board could benefit consumers, analysts have warned they could hurt corporate profits and cause deflation, a prolonged bout of falling prices that has not been experienced in the US since the Great Depression in the 1930s.
Some economists believe that a short-term fall in prices could encourage consumer spending and boost the stagnant economy.
However, a longer period of deflation could encourage consumers to hold on to their cash, in an attempt to get the most for the money - fuelling a recession.
Japan, a country that has suffered from deflation in recent years, reported on Thursday that its exports had fallen at the fastest pace in almost seven years as demand in China, the US and Europe had dropped.
Tokyo has now posted its second trade deficit in three months.
The announcement came just days after confirmation that the Asian powerhouse had fallen into recession as major manufacturers cut production because of falling global demand.