The Australian share market fell sharply on opening but clawed back ground in afternoon trade.
The ASX 200 was 1.3 per cent lower at 5,813 at 2:00pm (AEDT), and the All Ordinaries index had dropped 1.4 per cent to 5,914 points.
Negative sentiment across stock markets worldwide drove the Australian dollar lower to 77.7 US cents.
Despite its sharp losses, the local market was faring better than stocks across the Asia-Pacific.
Even steeper falls were recorded in Shanghai (-4.5pc) , Hong Kong (-4pc), Tokyo (-3.2pc) and Seoul (-2.1pc).
Only 20 stocks among the biggest 200 public companies had made any gains, and every sector had posted steep losses.
The weakest sectors were utilities (-2.7pc), energy (-2.1pc) and telecommunications (-2pc).
But the worst performing stock on the benchmark index was Myer, which plunged as much as 12 per cent after issuing a dire profit warning.
Meanwhile, the Reserve Bank provided a mixed forecast — upbeat about the economy's growth and falling unemployment, but not as optimistic on inflation or wages growth.
Volatility surges in the US
The Dow Jones Industrial Average has plummeted by more than 1,000 points for the second time this week.
The blue-chip Dow Jones index closed 4.15 per cent lower at 23,860, its second-worst day of the week.
In the final hour of trade, the S&P 500's and Nasdaq's losses deepened to 3.75 and 3.9 per cent.
Every S&P sector posted losses, with financials (-4.3pc), technology (-4.3pc) and consumer cyclicals (-3.9pc) being the worst performers.
The Dow and S&P are in correction territory, having fallen by more than 10 per cent since January 26, when they hit record highs.
Despite the sell-off, the Dow and S&P have gained 19 and 12.5 per cent respectively over the last 12 months.
Once again, the market wipeout was triggered by interest rates and concerns about higher inflation as the US economy strengthens.
US 10-year government bond yields lifted to 2.88 per cent, its highest level in four years — before falling back to 2.83 per cent.
The initial jump in bond yields occurred after the US Department of Labor released better-than-expected figures overnight.
It revealed that weekly jobless claims hit a 45-year low of 221,000 — down by 9,000 since last week.
US market volatility jumped by 27 per cent overnight, with CBOE'S volatility index (VIX) rising to 35.17.
The measure for market anxiety has more than doubled since last Friday — prior to the mass sell-off when the VIX index was at the relatively low 14.3.
"The dust hasn't settled yet, and I think both buyers and sellers are trying to figure out what this market really wants to do," said Jonathan Corpina, Meridian Equity Partners' senior managing partner.
"I would think that this continues to happen for the next few trading sessions for everything to kind of get flushed out."
But JP Morgan analyst Nikolaos Panigirtzoglou is more optimistic.
"We believe that the fundamental drivers of the equity market uptrend are still intact for the next one to two months," he said.
"These drivers are underpinned by still low real yields, robust global growth, profit margin expansion due to US tax reform and increased US share buyback activity due to repatriation.
"We see the recent 7 per cent dip in global equities as a buying opportunity rather than a reason to reduce equity risk in our portfolio."
European sell-off deepens
Furthermore, the London, Paris and Frankfurt indexes tumbled overnight, with falls between 1.5 and 2.5 per cent.
During the European session, the Bank of England (BoE) voted unanimously to keep British interest rates on hold at 0.5 per cent.
But the UK central bank warned rates may need to rise sooner, and by more than it had previously expected, due to an improving global economy.
This message was more hawkish than the market expected, causing the British pound to rise sharply.
It also sent UK bond yields higher by 49 basis points, which drove European stocks lower.
"It is no surprise to see interest rates being kept on hold this month," said Andrew Sentance, a former BoE rate-setter and senior economic adviser to accountants PwC.
"But it is still likely that we will see at least one quarter point rise in 2018 and possibly two or three."
Britain's economy slowed after the 2016 Brexit vote but has fared better than many investors expected at the time of the referendum, thanks largely to the much stronger global rebound in the US, Germany and other key trading partners.