The Dow tumbled 391 points to 24,361. The S&P 500 fell 32 points to 2,689 while the Nasdaq Composite slipped 37 points to 7,396.
At one point the Dow was down more than 500 points.
Concerns over Italy erupted when President Sergio Mattarella, who has been pro-European Union, vetoed the appointment of Paolo Savona as the country's finance minister, angering members of the populist government. Savona is a strong critic of the euro and was the choice of the two anti-establishment political parties, the Five Star Movement and League Party.
Following Mattarella's decision, both parties abandoned their attempts to form a government, prompting widespread speculation that a more radical faction will gain a stronger foothold in the government.
Mattarella made no excuses for his decision.
"The uncertainty over our position in the euro alarmed Italian and foreign investors," Mattarella said.
He said rising Italian sovereign debt, which is about $3 trillion, will cause Italy to continue to dip into its savings and hurt companies.
"Membership of the euro is a fundamental choice for the future of our country and our young people," Mattarella said.