US stocks dropped on Friday after President Donald Trump's surprise threat of tariffs on Mexico fueled fears that a trade war on multiple fronts could lead to a recession.

Washington says it will impose a 5 percent tariff on imports from Mexico, one of the US' largest and most important trade partners, beginning June 10, which would then rise steadily to 25 percent until illegal immigration across the southern border is stopped. Trump tweeted the decision late Thursday.

The Dow Jones Industrial Average fell 354.84 points, or 1.41 percent, to 24,815.04, the S&P 500 lost 36.8 points, or 1.32 percent, to 2,752.06 and the Nasdaq Composite dropped 114.57 points, or 1.51 percent, to 7,453.15.

The benchmark S&P 500 dropped nearly 6.6 percent for the month, its first monthly decline for the year to date, after hitting a record high in late April.

Carmakers led the retreat by dropping nearly 3 percent, while Volkswagen and Fiat Chrysler - both significantly exposed to Mexico - tumbled 3.6 percent and 5 percent.

Investors have grown more worried about deteriorating trade talks between the US and China. The US government raised tariffs from 10 to 25 percent on $200 billion worth of imports from China on May 10.  

Adding to risks was China's warning on Friday that it would unveil a list of "unreliable" foreign entities that harm the interests of Chinese companies. Tariff-sensitive industrials declined 1.46 percent.