Jones industrial average dropped 323 points to close below 10,000. It was the lowest finish since February and the third-worst slide of the year.
Major indexes all lost more than 3 percent. The drop pushed the market back into what's called a "correction," or a decline of at least 10 percent from its April high.
Interest rates slid after traders shoveled money into the safety of Treasurys and the dollar.
Retailers were among the hardest-hit stocks after investors bet that a weak job market would discourage consumers from spending. Macy's fell 6.5 percent. Financial stocks also fell sharply on concerns that borrowers would continue having problems paying their bills. Banks were hurt by more worries about their exposure to Europe's debt crisis. American Express lost 5.3 percent.
The government's May jobs report came as an unpleasant surprise for investors who had grown a little more upbeat about the domestic economy the past few days. The Labor Department said private employers hired just 41,000 workers in May, down dramatically from 218,000 in April and the lowest number since January. The news made it clear that the economic recovery isn't yet picking up the momentum that investors have been looking for.
The government said 431,000 jobs overall were created last month, but most of those them, 411,000, came from government hiring of temporary census workers. The overall number also fell short of expectations. Economists polled by Thomson Reuters had forecast employers would add 513,000 jobs.
"People are looking for one turning point," Daniel Penrod, senior industry analyst for the California Credit Union League, said of the monthly jobs report. "That's not realistic. This growth will be much slower and more gradual than in the past."
The unemployment rate fell to 9.7 percent from 9.9 percent in April. That was slightly better than the 9.8 percent unemployment rate economists had forecast.
The jobs report was the latest during the week to signal that the economy isn't as robust as hoped.
"It's almost as if the worst fears of the market were realized, at least in this one report," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research.
The slowdown in hiring last month cast more doubt on how much consumers will be able to pick up their spending. A day earlier, retailers reported sluggish sales for May. Stocks of clothing retailers were among the big losers after the jobs report as traders bet shoppers would stick to buying necessities.
Credit card companies and regional banks also fell sharply.
Meanwhile, the spokesman for Hungary's new prime minister described the country's economy as being in a "grave" situation. He also said his government is ready to avoid a crisis like the one being faced by Greece, which had to be bailed out by the European Union. Spain and Portugal are also struggling.
The Dow fell 323.31, or 3.2 percent, to 9,931.97, its steepest drop since May 20. All 30 stocks that make up the index fell.
It was the Dow's third drop of more than 300 points this year, all of which occurred in the last month. The Dow is now down 11.4 percent from its 2010 peak of 11,205, which it reached on April 26.
The Standard & Poor's 500 index fell 37.95, or 3.4 percent, to 1,064.88. The index is down 12.5 percent from its 2010 high.
The Nasdaq composite index dropped 83.86, or 3.6 percent, to 2,219.17. It's down 12.3 percent from its high of the year.
Fewer than 300 of the nearly 3,000 stocks that trade on the New York Stock Exchange rose. Consolidated volume came to 6.3 billion shares compared with 5 billion Thursday.
Only three of the stocks in the S&P 500 index rose: Cephalon Inc., Frontier Communications Corp. and People's United Financial Inc.
For the week, the Dow lost 2 percent, its third straight weekly drop. The S&P 500 index fell 2.3 percent and the Nasdaq dropped 1.7 percent.