The Toronto S&P/TSX composite index stock fell 585 points Thursday, the biggest drop in six years, before recovering to close down 200.06 points.
The S&P/TSX composite index finished the day at 12,848.7, wiping out any gains made this year.
Federal Finance Minister Jim Flaherty said he's watching the troubled financial markets closely, but said Canada's economic fundamentals remain strong.
Over the past two weeks, the TSX and other markets around the world have been devastated by spreading fears over credit problems.
The greatest losses are to resource stocks. CP reports that investors are worried the global credit crunch could hurt the demand for commodities.
New York markets also had a rough time, but managed a better recovery late in the day.
Wall Street's Dow Jones industrials fell an initial 343 point, but bounced back to a loss of 15.69 points to end at 12,845.78. The Nasdaq composite index was down 7.76 points to 2,451.07, while the S&P 500 index climbed 4.56 points to 1,411.26.
A rise in the rate of defaults on subprime mortgages in the U.S. -- loans given to customers with poor credit history -- sparked the massive selloff that led to the current crisis.
Business News Network's Michael Kane said the losses have wiped out gains made by the TSX, which was up almost 14 per cent for the year as of July 19.
"A matter of a few weeks ago the TSX Composite Index was up 14 per cent, it was looking really great and then this credit constriction, this credit squeeze hit the U.S. mortgage market," Kane told Â鶹´«Ã½net.
"It started drifting around the world, we started getting more evidence from around the world that something was wrong and as a result, we have seen concerted selling here just in the last few days to the point where it has really picked up momentum."
But even though the market is suffering losses, Kane said it will inevitably reach a point where the market stops hemorrhaging and begins to rebuild.
"It is a normal correction. It is hard to believe, but it is a healthy thing. It's just a little rough when you're riding your way through," Kane said.
In Canada, a group of big players conferred Thursday in Montreal, agreeing to convert short-term commercial paper into floating-rate notes that won't mature until the underlying financial assets do. The initiative is an attempt to mend fractures in the Canadian commercial paper sector
The group is comprised of ABN Amro, Barclays Capital, Quebec's Caisse de depot, Desjardins Group, Deutsche Bank, HSBC, PSP Investments, Merrill Lynch, National Bank and UBS.
They hold at least two-thirds of all third-party structured finance asset-backed commercial paper, or ABCP.
With files from The Canadian Press
