The US embassy website said levels of the fine pollutants known as PM2.5 that are most harmful to health reached 703 -- well over double the threshold of 300 which authorities class as hazardous.
"The moment I stepped out of my home I started coughing and there was a burning sensation in my eyes," said Naresh Yadav, a bank employee, as he walked to work in central Delhi.
"The government can't solve this problem alone, people need to pitch in and help the government to protect the environment."
Delhi's air quality typically worsens ahead of the onset of winter as cooler air traps pollutants near the ground, preventing them from dispersing into the atmosphere, a phenomenon known as inversion.
Firecrackers set off to celebrate the Diwali festival of lights in the city add to the toxic mix created by pollution from diesel engines, coal-fired power plants and industrial emissions.
The problem is further exacerbated by the burning of crop stubble by farmers after the harvest in north India, a practice that remains commonplace despite an official ban.
India's Central Pollution Control Board said high levels of moisture in the air and a lack of wind meant emissions had become trapped in the environment.
"Total calm conditions, marked by the complete absence of wind, has led to the situation," Dipankar Saha, a senior executive with the board, told the Press Trust of India news agency.
"The moisture has trapped emissions from ground-level sources."
The hashtag #smog was the top trending topic on Twitter early Tuesday as angry residents demanded stronger measures to curb pollution.
"This is the state of air quality this morning in Delhi-NCR! Horrific!" posted one resident beside a picture of thick smog.
Unprecedented pollution levels this time last year forced schools to shut as authorities scrambled to contain the crisis.
The World Health Organization in 2014 classed New Delhi as the world's most polluted capital, with air quality levels worse than Beijing.
A report in the Lancet medical journal last month said pollution had claimed as many as 2.5 million lives in India in 2015, the highest in the world.
Last month an environmental watchdog ordered the shutting down of all diesel generators and the city's lone coal-fired power plant as part of a slew of measures to curb pollution.