In Europe, the slide in equity markets more than offset modest gains for heavyweight energy shares on the back of record oil prices.
"The market has been beaten to its knees and the downturn will probably continue," said Christian Schmidt, analyst at German bank Helaba.
News that Zurich Financial Services had pulled out of the auction for Royal Bank of Scotland's insurance business pushed banking stocks lower.
France's Credit Agricole fell almost 10 percent and domestic rival Societe Generale lost 7 percent, while RBS lost 8.6 percent.
Zurich Financial shares jumped 4.2 percent.
U.S. Treasury debt prices slipped on fears the government would need to sell more debt to back a potential takeover, and sparked a rally in Fannie and Freddie debt.
The benchmark 10-year U.S. Treasury note fell 25/32 to yield 3.89 percent. The 30-year U.S. Treasury bond fell 36/32 to yield at 4.48 percent.
The dollar lost more ground versus the euro and yen after Paulson gave no indication of an imminent bailout. Investors fretted about the impact of the credit crisis.
The dollar fell against major currencies, with the U.S. Dollar Index off 0.65 percent at 72.02. Against the yen, the dollar fell 0.92 percent at 106.08.
The euro was up 0.68 percent at $1.5891.
U.S. light sweet crude oil rose $2.69 percent to $144.34 per barrel.
Spot gold prices rose $11.80 to $957.95 an ounce.
Overnight in Asia, stocks rose and government bond prices fell as investors initially believed efforts to bolster Fannie and Freddie would stem further fallout from the global credit crisis.
Japan's Nikkei share average closed down 0.2 percent and shares elsewhere in the Asia-Pacific region rose 1.3 percent, heading for the first weekly gain since mid-May.
Fannie and Freddie have been hit hard by the U.S. housing crisis, seeing borrowing costs rise and suffering billions of dollars of losses as many investors lose confidence they can raise sufficient capital to stay afloat.
If they failed it would make it far more difficult and perhaps impossible for people to obtain home loans, which could cause the already hard hit housing market to grind to a halt.
"The credit crisis is getting more intense, the run-up in oil is getting more intense, and of course the potential for military conflict (with Iran) is intensifying," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco
"There isn't anything out there that's good. Nobody wants to be a long holder of stocks over the weekend. For the most part people are at their most defensive levels."
