The White House is threatening the restrictions as a bargaining tool as part of the trade talks with China. Stocks ended in the red for the second consecutive week, with the Nasdaq recording its worst week in two months.
US President Donald Trump is considering delisting Chinese companies from US stock exchanges, multiple US reports suggested on Friday.
The move would reportedly come as part of a broader effort to limit US investment in Chinese companies and is partly motivated by security concerns.
The threats were intended to increase pressure on Beijing to strike a bargain, Gregori Volokhine, strategist for Meeschaert Financial Services, told news agency AFP.
Legal experts cautioned that Trump lacks the statutory authority to enact such a move, but that he may nonetheless strong-arm investment firms to enforce his will.
The possibility of severe new restrictions on investment in China sent stocks into a tailspin on Wall Street.
The Wall Street nosedive comes in the wake of a relatively positive week, where markets climbed as analysts said fresh optimism about the US-China trade talks was gathering pace.
However, big players on the stock market saw their share prices fall following Friday's reports.
Shares of Hangzhou, Zhejiang-based Alibaba ended down 5.15%. JD.com saw its price fall 5.95% and Baidu Inc went down by 3.67%. The iShares China Large-Cap ETF lost 1.15%.
New York Stock Exchange owner Intercontinental Exchange Inc ended the day down 1.88% and shares of Nasdaq Inc fell 1.7% in value.
Reports of the strategic moves from Washington also hit oil prices.
Meanwhile, Chinese Foreign Minister Wang Yi vowed to stand firm in the US trade row, warning that protectionism could trigger a world recession.
"The lessons of the Great Depression should not be forgotten," he told the United Nations General Assembly in New York.
"Tariffs and provocation of trade disputes, which upset global industrial and supply chains, serve to undermine the multilateral trading regime and global economic and trade order," he said.
"They may even plunge the world into recession," the foreign minister added.
jsi/aw (Reuters, AFP)