Stocks took a sharp nosedive in another choppy day Monday to finish at session lows as investors fled from risky assets following S&P's downgrade of U.S.'s credit rating last week in addition to ongoing economic jitters.

The Dow Jones Industrial Average plunged 634.76 points, or 5.55 percent, to finish at 10,809.85, well below the psychologically-significant 11,000 mark. The move marks the blue-chip index's biggest point and percent drop since Dec. 1, 2008.

BofA and Alcoa were the top laggards on the index.

The S&P 500 plummeted 79.92 points, or 6.66 percent, to close at 1,119.46, its lowest close since Sept. 10, 2010.

Nasdaq sank 174.72 points, or 6.90 percent, to end at 2,357.69, its lowest close since October 4, 2010.

August is already on track to be the worst month for the S&P and Nasdaq since Oct. 2008.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, spiked above 40 to touch its highest level since Mar. 2009.

All 10 S&P sectors ended lower, led by banks, energy and materials. Financials have plunged more than 20 percent this year.

Volume was very heavy with the consolidated tape of the NYSE at 9.29 billion shares, while 2.54 billion shares changed hands on the floor. That exceeded last Friday's heavy volume, which was the heaviest since the Flash Crash on May 6, 2010. According to Dow Jones, this was the 4th largest volume day in history on the NYSE.

“Once we took out Friday’s lows, it was like a trapdoor opened,” Art Cashin, director of floor operations at UBS Financial Services told CNBC. “This is very heavy volume again and that tells me that we’ve got people liquidating to raise cash."

Moody's said while they are maintaining the U.S.'s AAA status, the agency said it has doubts over the long-term enforceabilityof the budget cuts already decided by Congress.

This comes after Standard & Poor's move to downgrade U.S.'s rating to AA-plus from AAA last Friday after a wild week for stocks—its worst in more than two years.

And in its latest move, S&P also lowered Fannie Mae, Freddie Mac and Federal Home Loan Bank's debt to AA-plus from AAA.

S&P came in for significant criticism from U.S. Treasury Secretary Timothy Geithner, who said the rating agency showed "terrible judgment" in lowering the U.S. government’s credit rating.

Meanwhile, President Obama said financial markets around the world "still believe our credit is AAA and the world's investors agree," although his speechdid little to cheer up the market.

David Beers, global head of sovereign ratings at S&P, defended the firm's position, despite the discovery of a $2 trillion error in the firm's calculation of the projected debt to GDP ratio for the U.S.