The S&P/TSX composite index fell 150.32 points to 12,443.65 with declines spread across most sectors.
The Dow Jones industrials plunged 216.95 points to 14,960.59, while the Nasdaq fell 43.78 points to 3,401.48. The S&P 500 index was down 22.48 points to 1,608.9.
The Canadian dollar closed down 0.01 of a cent to 96.66 cents US amid a strong housing report.
Statistics Canada said municipalities issued $7 billion worth of building permits in April, up 10.5 per cent from March and far better than the month-to-month decline that analysts had expected.
Meanwhile, signs of disappointing employment data crossed traders' desks before the market open as payroll firm ADP reported Wednesday that the U.S. private sector cranked out 135,000 jobs during May, less than the 165,000 that had been expected.
The ADP report came two days before the release of the U.S. government's official employment data for last month.
More bad news came mid-morning amid data showing stronger expansion of the U.S. non-manufacturing sector. The Institute for Supply Management's index came in at 53.7, better than the 53 reading that had been expected and up from 53.1 in April. But the data also showed that hiring slowed further in May to the lowest level since last July, coming in at 50.1.
Also, the Fed's so-called Beige Book said economic growth increased throughout the United States from April through mid-May, fuelled by home construction, consumer spending and steady hiring.
The mostly favourable report suggested the economy and the job market were improving despite tax increases and government spending cuts that took effect this year.
But the modest or moderate improvement reported for most regions appeared to fall short of the "strong and sustained growth" that Fed members have said is needed before the Fed starts tapering its bond purchases.
The Fed's monetary stimulus program, involving spending $85 billion a month on bond purchases, has been a huge support to stock markets over the past few years. The purchases are designed to keep interest rates low and give the U.S. economy a lift.
There has been much speculation of late that generally improving data would persuade the Fed to reduce its quantitative easing program.
"The Fed has invested the last four or five years a significant amount to assure everyone that we have a sustainable economic recovery ahead of us, even if it might be modest," said Paul Taylor, chief investment officer for BMO Harris Private Banking.
"And it would be entirely inconsistent with that endeavour for the Fed to reverse and unwind very loose monetary conditions and run the risk of a hard landing of the U.S. economy. And they have been explicit to the investment community about that."
The speculation over Fed intentions has resulted in much market volatility and raised doubts as to whether the strong rally in New York has run its course. Even with Wednesday's decline, the Dow industrials are up 14 per cent year to date while the TSX is barely up from where it started the year.
The industrials sector led declines, down 2.16 per cent with Canadian Pacific (TSX:CP) shares down $5.76 or 4.37 per cent to $126.
CP Rail stock also fell almost three per cent Tuesday after Bill Ackman’s Pershing Square Capital Management, the railway's biggest shareholder, said that it plans to sell about a third of its holding over the next six to 12 months.
Resource stocks were also weak with the base metals sector down 1.22 per cent per cent while July copper shed early gains to close unchanged at US$3.37 a pound. Teck Resources (TSX:TCK.B) dropped 71 cents to C$27.11.
HudBay Minerals Inc. (TSX:HBM) was three cents lower to $8.31 as the miner as downgraded by Moody's Investors Service to a corporate family rating of B3 from B2. The ratings agency says it believes HudBay will likely require additional capital to develop its various growth projects and will at least partially fund that requirement with debt.
The energy sector dropped 1.25 per cent as July crude on the New York Mercantile Exchange gained 43 cents to US$93.74 barrel. Canadian Natural Resources (TSX:CNQ) gave back 56 cents to C$29.83.
The telecom sector was down 1.2 per cent, a day after Industry Minister Christian Paradis said Mobilicity and other new wireless carriers won’t be allowed to sell spectrum to big carriers. The move was a setback for Telus (TSX:T) which had asked permission to acquire Mobilicity and its spectrum. Telus shares shed 65 cents to $35.16.
Financials also weighed, down 1.25 per cent with TD Bank (TSX:TD) down $1.17 to $46.23.
Laurentian Bank (TSX:LB) climbed 15 cents to $44.20 as it said it is boosting its quarterly dividend by a penny to 50 cents a share as its second-quarter profit increased four per cent to $35.1 million.
The gold sector was the only advancer, up about 0.65 per cent with August bullion up $1.30 US$1,398.50 an ounce. Iamgold (TSX:IMG) improved by 13 cents to $5.69.
In other corporate news, Penn West Petroleum Ltd. (TSX:PWT) says it will be cutting its quarterly dividend by half, slashing 10 per cent of its staff and undertake a strategic review of the company with a new president and chief executive officer in place. The company says a former senior executive from Marathon Oil, David Roberts, will become the new CEO and president on June 19 and the current CEO, Murray Nunns, will retire on July 1. Its shares shed 45 cents to $10.45.