It was the Dow's steepest one-day drop since November.
The Standard & Poor's 500 index and Nasdaq composite index both fell more than 3 percent. The Nasdaq has dropped more than 10 percent since its peak what traders call a market correction. The S&P 500 is just a point above correction territory.
American employers added just 69,000 jobs in May, the fewest in a year, and the unemployment rate increased to 8.2 percent from 8.1 percent. Economists had forecast a gain of 158,000 jobs.
The report, considered the most important economic indicator each month, also said that hiring in March and April was considerably weaker than originally thought.
Earlier data showed weak economic conditions in Europe and Asia, too. Unemployment in the 17 countries that use the euro currency stayed at a record-high 11 percent in April, and unemployment spiked to almost 25 percent in Spain.
There were signs that growth in China, which helped sustain the global economy through the recession, is slowing significantly. China's manufacturing weakened in May, according to surveys released Friday.
The Dow closed down 274.88 points, or 2.2 percent, at 12,118.57. The Dow is off 0.8 percent for the year; two months ago, it was up more than 8 percent for the year.
The Standard & Poor's 500 index fell 32.29 points, or 2.5 percent, to 1,278.04. The Nasdaq dropped 79.86, or 2.8 percent, to 2,747.48. Both indexes are still up for the year 1.6 percent for the S&P 500 and 5.5 percent for the Nasdaq.
Traders sold all types of risky investments and rushed to the safety of U.S. government bonds and gold. Bond prices rose sharply, briefly pushing the yield on the benchmark 10-year U.S. Treasury note down to 1.44 percent, the lowest on record. The yield ended the day at 1.46 percent.
Gold for August delivery climbed $57.90, nearly 4 percent, to $1,622.10 per ounce.
"Everybody's looking for a safe haven," said Adam Patti, CEO of IndexIQ, an asset management firm. He's skeptical of that strategy, believing the swing was driven by short-term traders "looking to flip in and out of things," rather than long-term investors willing to ride out a few bumps in the market.
May was the worst month for the stock market in two years by some measures. Investors' worries about Europe's debt crisis intensified as the month wore on. Greece's political future is uncertain, and it appears increasingly likely to stop using the euro currency. That could rattle financial markets and make Greece's economy already hobbled even weaker.
Friday's jobs report drew traders' attention back to the weakening U.S. economy, said Todd Salamone, director of research for Schaeffer's Investment Research in Cincinnati.
"The weaker jobs report translates into anticipation of slower growth ahead and weaker corporate earnings, and that ratchets stock prices lower," Salamone said.
The record-low yield on the 10-year Treasury note reflected rapid buying by traders with the biggest portfolios, including central banks, endowments and pension funds, said Ira Jersey, U.S. interest rate strategist at Credit Suisse. He said money managers were selling investments priced in euros and stashing their money in U.S. securities.
Several analysts raised the possibility that the weakening economy will prompt more action by governments and central banks seeking to juice global economic activity. Anticipation of some policy response prevented even deeper losses, Stovall said.
The Federal Reserve undertook programs in 2009 and 2010 to buy U.S. government bonds. Its goal was to lower interest rates and encourage people to buy riskier investments like stocks. At least in public, the central bank so far has resisted a third round of purchases, known as quantitative easing.
Anticipation of bond-buying by the Fed "might put in a little bit of a floor to the market, but the overall economic picture is still bad," said Bob Gelfond, CEO of MQS Asset Management, a New York hedge fund.
The dollar fell partly because traders expect more intervention by the Federal Reserve, Gelfond said.
The euro rose half a penny against the dollar to above $1.24. A day earlier, fears about Europe's finances had pushed the euro to a nearly two-year low against the dollar.
Only 17 of the 500 companies in the S&P index were higher for the day.
Homebuilder stocks fell the most, despite a report that construction spending rose for a second month in April. PulteGroup fell 11.8 percent, D.R. Horton 8.4 percent and Lennar 8.3 percent.
Boeing, the biggest U.S. exporter, fell 3.4 percent, one of the biggest declines among the 30 companies that make up the Dow. Traders fear that the economic slowdown will hurt global demand for its airplanes and defense technologies.
A slower global economy would reduce demand for energy. The price of a barrel of oil fell $3.49 to $83.04, extending a monthlong slide. The price of oil is at a 16-month low.
Stocks closed way down in Europe. Greece's benchmark stock index fell 4.4 percent, Germany's 3.4 percent and France's 2.2 percent.
AP business writers Matthew Craft, Joseph Pisani and Christina Rexrode in New York contributed to this report.
Daniel Wagner can be reached at www.twitter.com/wagnerreports.