This week's market pullback has come even as US economic data continues to reflect strong growth.
The Nasdaq has fallen more than 100 points despite Amazon reporting record earnings.
However, even after last week's sell-off, stock markets remain at historic highs.
This prompted the 10-year Treasury yield to surge to a 4-year high, raising concerns that higher yields may adversely affect businesses.
The Dow ended the day at 25,520.96 points, a 2.54 percent decrease from the close of markets Thursday.
The selloff in USA assets picked up steam Friday as strong jobs data increased the likelihood the Federal Reserve will lift rates next month. Elsewhere, Japan's Nikkei fell 0.9%, as SoftBank retreated and financial shares tumbled after the Bank of Japan offered a special bond purchase to try and contain rising yields.
The "VIX" has spent months at historically low levels, reflecting a placid market mood that seems to have evaporated over the past week.More news: Youtube TV is Now Available on Apple TV Devices
"It's a legitimate concern, when inflation spikes up a little bit, that people should evaluate how is this going to affect profits and how is this going to affect the Fed", said Jonathan Golub, chief USA equity strategist at Credit Suisse.
Investors have spent much of the previous year shrugging off geopolitical and economic risks, from the threat of nuclear conflict with North Korea to a potential trade war with China.
The expectation among investors has always been for a gradual rise in interest rates, as the Federal Reserve slowly pulls back from the stimulus that it implemented for the economy amid the Great Recession.
"What is good for the average American worker ends up being negative for stocks because it increases the odds of further rate hikes", Michael Antonelli, managing director of institutional sales trading at Robert W. Baird in Milwaukee. "The easy money had been made, and it will be more challenging to extend the gains as interest rates move higher".
The U.S. bond market's gauges of inflation expectations added to their earlier rise on Friday as domestic wages recorded their strongest annual increase in more than 8-1/2 years, suggesting inflation may be accelerating. The rate was at 2.41 percent four weeks ago and 2.66 percent on Monday.
On Wednesday, the Federal Reserve left its benchmark interest rate unchanged at 1.25 to 1.5 percent after its two-day meeting, while giving an upbeat assessment of recent US economic growth.
The unemployment rate was unchanged at a 17-year low of 4.1 percent.
Investors have grown increasingly anxious that a rapid rise in interest rates, spurred by higher inflation, could derail the market's strong and calm ride upward. On Friday, the 10-year Treasury yield jumped to as high as 2.85 percent, a four-year high, putting pressure on the stocks.