The S&P/TSX composite index lost 296.4 points to 12,387.54, with the mining sector, down four per cent, leading all sectors lower. That erased the week's earlier gains and left the market down 1.7 per cent for the week.
The TSX Venture exchange lost 19.04 points to 1,785.1.
The dollar fell 0.81 of a cent at 100.34 cents US after Statistics Canada data showed the economy shed jobs in August for the first time in five months. That pushed the Canadian unemployment rate up by one-tenth of a point to 7.3 per cent.
Wall Street also closed in a slump with the Dow Jones industrial average down 303.68 points to 10,992.13 while the Nasdaq composite index lost 61.15 points to 2,467.99. The broader S&P index shed 31.67 points to 1,154.23.
Already heading lower after investors appeared unmoved by President Obama's announcement of a $447-billion plan for jobs creation, markets dropped further after a top European Central Bank official unexpectedly resigned.
The ECB said Juergen Stark, part of the six-member governing board, was quitting for personal reasons. Investors, however, note Stark has been a consistent critic of the ECB's program to purchase government bonds in the markets.
In the U.S., the economy faces slowing growth and a stubbornly high unemployment rate. President Barack Obama unveiled a $447 billion jobs program Thursday night, but Wall Street is not convinced that the proposal can pass through a divided Congress.
Chris King, vice-president and portfolio manager at Meighen and Associates, said traders reacted poorly to Obama's speech.
"I think this market is rather fickle and behaving like a spoiled child, because when you have a banking and real estate crash, the recovery that we are currently in... is acting exactly as it should," King said.
He noted that the TSX is still up about 10 per cent from where it was last September, and that a recovery takes time.
"In terms of job growth, we are exactly like we were in 1991, it just takes time to back fill the two biggest sectors in an economy."
Canada's loss of employment was small in August — 5,500 — but it was the second consecutive month that jobs growth was virtually non-existent in Canada, a clear signal that the economy continues to struggle. Economists had expected a 25,000 job gain.
There was also more Canadian data released Friday morning that suggested a slowdown in the economy.
The Canada Mortgage and Housing Corp. says the pace of home construction slowed last month to a seasonally adjusted annual rate of 184,700 units — down from 204,500 in July. And Statistics Canada said the labour productivity of Canadian businesses fell 0.9 per cent in the second quarter, after increasing 0.4 in the first.
Oil backed off by US$1.81 to $87.24 per barrel as investors mulled whether the new U.S. jobs package will help boost crude demand.
Gold futures had been down but turned around to add $2 at US$1,859.50 per ounce as jittery investors sought out the safe haven once again. Copper prices lost 14 cents to US$4 per pound.
Traders were also treading lightly as the financial leaders of the world's most developed economies wrangled Friday over how to revive a faltering economic recovery at a time when interest rates are already low and government debt is high.
The so-called Group of Seven economies — the U.S., Canada, Japan, the U.K., France, Italy and Germany — are all facing a similar challenge. The recovery that began a little over a year ago is already running out of steam but governments' ability to boost growth is hampered after the financial crisis pushed up their deficits.
France's CAC 40 and Germany's Dax fell about four per cent. London's FTSE lost more than two.
In Canadian corporate news, Lululemon Athletica Inc. (TSX:LLL) says second-quarter net income rose to $38.6 million from $21.7 million in the comparable period a year ago. Revenue increased 39 per cent to $212.3 million from $152.2 million. Shares fell $2.10 to $54.94.
Scotiabank (TSX:BNS) is buying nearly 20 per cent of a Chinese bank in a deal worth about $719 million. Shares lost $1.18 to $51.63.
The board of Cold-FX flu remedy maker Afexa Life Sciences Inc. (TSX:FXA) has given its final stamp of approval to a friendly $76-million takeover bid by Valeant Pharmaceuticals International Inc. (TSX:VRX). Afexa shares were unchanged at 73 cents each, while Valeant shares lost $1.43 to $40.74.
And Wi-LAN Inc. (TSX:WIN) said it's disappointed the board of directors of Mosaid Technologies Inc. (TSX:MSD) has recommended its shareholders reject its takeover offer of $38 per share. Mosaid shares lost 33 cents to $39.67, while Wi-LAN shares fell 19 cents to $6.96.