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NEW YORK ( TheStreet) -- The Dow Jones Industrial Average dropped below the 11,000 level and the other major U.S. equity indices plunged more than 6% as an unprecedented downgrade to the U.S. credit rating intensified worries about the global economic outlook.

The Dow has plummeted 9% in just three trading days, trading as low as 10,839 in late-afternoon trading Monday. The blue-chip index has not closed below 11,000 since September 2010.

By the closing bell, the Dow settled down 635 points, or 5.5%, at 10,811. The S&P 500 lost 80 points, or 6.7%, to 1120, and the Nasdaq closed down 175 points, or 6.9%, at 2358.

The decision from rating agency Standard & Poor's to cut its rating on the U.S. government's debt to AA+ from AAA triggered a widespread selloff starting with global equities overnight. S&P's announcement late Friday night followed a week that saw U.S. equities lose 7% .

The Dow plummeted to session lows after President Obama emphasized that U.S.'s challenge has to do with a long-term debt solution, not a credit problem. The president said reform does not require "radical steps," calling instead for tax increases and spending cuts. He also urged Congress to extend the payroll tax cut and unemployment benefits.

Strategists have noted that the adverse reaction Monday was in part psychological. The loss of the U.S.'s triple-A rating "may lead investors to feel that the world is suddenly a riskier place," said Aaron Gurwitz, Barclays Wealth chief investment officer, in a recent note.

"Since the downgrade contains no new information about how risky the world is -- only that a rating agency decided to opine on Friday that the world was riskier than they'd previously said it was -- this effect should be ephemeral," he added.

Few investors think that the U.S. will default on its debt, said Alan Gayle, senior investment strategist at RidgeWorth Investments. "At the end of the day, it's about the trends in economic growth."

Underlining the depth of investor worries, the VIX, Wall Street's so-called fear index, which is based on options activity in the S&P 500, soared nearly 40% to 45, a level unseen since May 2010.

Gold prices shot to an all-time high , rising above $1,721 an ounce as the uncertain climate triggered a flight to quality. Gold for December delivery gained $61 to settle at $1,710 an ounce.

Investors were still treating Treasuries as a safe-haven asset despite the U.S. downgrade . The benchmark 10-year Treasury jumped 1 2/32, diluting the yield to 2.33%. The dollar strengthened against a basket of currencies, with the dollar index up by 0.2%.

As an indication of heightened recessionary fears, oil prices were plunging with the September crude oil contract shedding more than $5 to settle at $81.31 a barrel.

On Monday, S&P also cut ratings on government-sponsored mortgage giants Fannie Mae, Freddie Mac and 10 of the 12 Federal Home Loan Banks to AA+ from AAA.
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