Facebook's woes also dragged down Twitter, whose share price tumbled more than 10 per cent on Tuesday amid concerns it, too, could be subjected to new government regulations. Shares of Snap, parent company of Snapchat, were down 2.8 per cent.
The Wall Street sell-off comes after reports that Facebook user data was improperly obtained by Cambridge Analytica, a consulting firm used by Donald Trump's 2016 presidential campaign.
Last Friday, Facebook announced that it kicked Cambridge Analytica and its parent company off the platform, claiming the researcher who provided the data to them violated Facebook's policies. Both Cambridge Analytica and Facebook have denied that the user data was used as part of the firm's work for the Trump campaign.
Among new developments, the Federal Trade Commission has launched an investigation into whether Facebook violated the terms of its 2011 consent decree with the agency, Bloomberg reported. Under that agreement, Facebook committed to explicitly obtaining user consent for certain changes to privacy settings after the FTC alleged Facebook misled consumers and into sharing more personal information than they intended.
Facebook confirmed that it expected to receive an inquiry letter from the FTC this week. "We remain strongly committed to protecting people's information," Facebook deputy chief privacy officer Rob Sherman said in a statement. "We appreciate the opportunity to answer questions the FTC may have."
Facebook was said to be holding all-hands-on-deck meetings with employees about the situation on Tuesday.
In addition, the UK's House of Commons Digital, Culture, Media and Sport Committee on Tuesday requested that CEO Mark Zuckerberg appear before its Fake News inquiry to explain the Cambridge Analytica situation. That came after US lawmakers issued calls for similar hearings.
Some Wall Street analysts believe Facebook won't suffer any long-term setbacks from the latest controversy. "We see notable issues, but believe FB will work through them," CFRA Research's Scott Kessler wrote in a note Monday, reiterating the firm's "buy" rating on the stock.
So far, top Facebook execs including Zuckerberg have stayed silent on the controversy.