US stocks suffered their worst one-day percentage drop since October 30 on Thursday and the dollar fell against other currencies after Obama's announcement.
JPMorgan fell 6.59 per cent, Citigroup lost 5.49 per cent, Bank of America Corp dropped 6.19 per cent and Goldman slid 4.12 per cent - despite posting strong earnings on Thursday - helping to push the Dow Jones industrial average down by two per cent.
Obama outlined restrictions that would affect some banks' most lucrative operations, which he blamed for contributing to the financial crisis.
"If these folks want a fight, it's a fight I'm ready to have," Obama told reporters at the White House on Thursday, flanked by his top economic advisers and legislators.
"We should no longer allow banks to stray too far from their central mission of serving their customers."
Obama's latest proposed crackdown on banks follows a shock loss for his Democratic party in the state of Massachusetts on Tuesday when a Republican captured a senate seat for the first time in more than half a century, threatening to derail the president's domestic agenda.
|Obama's move comes after the Democrats' shock loss of a senate seat [GALLO/GETTY]
The new proposals, which need congressional approval, will prevent banks or financial institutions owned by banks from investing in, owning or sponsoring a hedge fund or private equity fund.
They would also set a new limit on the size of banks in relation to the overall financial sector that would take into account deposits – which are already capped – as well as liabilities and other non-deposit funding sources.
In addition, the proposed rules would bar institutions from proprietary trading operations, unrelated to serving customers, for their own profit.
Proprietary trading is where firms make bets on financial markets using their own money rather than execute a trade for a client.
These expert trading operations, which can bet on stocks and other financial instruments to rise or fall, have been enormously profitable for the banks but also hold huge risks for the financial system if the bets go wrong.
Big financial institutions criticised the plan.
"Trading, proprietary or otherwise, did not lead to the financial crisis," said Rob Nichols, president of the Financial Services Forum, a lobbying group for CEOs of firms such as Goldman Sachs and JPMorgan.
He said the government should be focused on better risk management, corporate governance and other forms of regulatory oversight, "rather than arbitrarily banning certain activities, or setting arbitrary size limits".
Ralph Fogel, an investment strategist at Fogel Neale Partners in New York, said the move would have a major impact on big-name firms.
"If they stop prop trading, it will not only dry up liquidity in the market, but it will change the whole structure of Wall Street, of the whole trading community," Fogel told the Reuters news agency.
An Obama aide said the plan had the unanimous backing of his economic team, but financial industry sources, speaking anonymously, said Timothy Geithner, the treasury secretary, had private reservations about the proposals.
They said Geithner was concerned about the impact of the proposed limits on the global competitiveness of US firms, and that the new rules did not necessarily get at the root of the problems and excesses that fuelled the recent financial meltdown.