The broader S&P 500 was down by even more, and had its worst day in more than six months.
The tech-heavy Nasdaq composite dropped 3.1 per cent. That's good news for markets: If inflation were to spike, it would push the Federal Reserve to get more aggressive in raising interest rates.
Andrew Bascand, managing director of Harbour Asset Management, said the last time the New Zealand market dropped by this much in a day was probably in February when there was a similar period of rising bond yields.
The markets have been on a historic climb - with the Dow and S&P each notching dozens of new highs since 2016 - buoyed by a strong USA economy and solid corporate earnings.
The jump in yields came a day after the International Monetary Fund slashed its global growth forecast on worries about trade wars and weakness in emerging markets.
Major economic reports have pointed to unemployment at a 50-year low and tax cuts beginning to take effect.
President Trump reiterated those concerns Wednesday. The Fed aims to raise rates to about 3 percent. "This is a bull market correction".
The Dow Jones industrial average lost 248, or 0.9 percent, to 26,183, and the Nasdaq composite dropped 145, or 1.9 percent, to 7,589.
The benchmark S&P/ASX200 index was down 119.1 points, or 1.97 per cent, at 5,930.7 points at 1030 AEDT on Thursday, slipping below the 6,000-point mark for the first time since early June.
The S&P 500 index hasn't suffered a five-day losing streak since November 2016, just before the U.S. presidential election.
Share in FMG are up 1.36 per cent to $3.72, while BHP is down 2.62 per cent at $33.81, a fall only marginally worse than fellow mining giant Rio Tinto's 2.43 per cent to $77.25.
USA crude settled down $1.79 at $73.17 per barrel and Brent fell $1.91 to settle at $83.09.
After a long stretch of relative calm, the stock market has suffered sharp losses over the last week as bond yields surged. But over the past five days, the losses stuck, and on Wednesday the selling went on right to the closing bell.
Apple (AAPL), Boeing (BA), Caterpillar (CAT) and Nike (NKE) - Dow stocks that all have a significant presence in China - were among the bigger blue chip losers on Wednesday.
The two-year yield soared to its highest mark since 2008.
The Dow, the S&P and the Nasdaq all hit record levels between August 30 and October 3, even as the U.S.
"We've scratched our heads about the rise in stocks for the past 18 months".
Investors are leaning into safer stocks with steady dividends - utilities and consumer staples - and pulling out of the higher-paying, higher-risk stocks as other guideposts of growth, like the communication sector, tumbled. They also make bonds more attractive investments.
Wall Street stocks plunged Wednesday, with major indices losing more than three percent in a selloff prompted by the sudden jump in USA interest rates.
Gina Martin Adams, the chief equity strategist for Bloomberg Intelligence, said investors fear that company profit margins will be squeezed by rising costs, including the price of oil.
"Amazon recently announced they were increasing wages, Facebook is spending a ton on security", she said.
Insurance companies dropped as Hurricane Michael continued to gather strength and came ashore in Florida bringing winds of up to 155 miles per hour. Berkshire Hathaway dipped 4.7 percent to $213.10 and reinsurer Everest Re slid 5.1 percent to $217.73.
Sears Holdings nosedived after the Wall Street Journal reported that the struggling retailer hired an advisory firm to prepare a bankruptcy filing that could come within days.