Wall Street sinks 3% on China nerves

US stocks tumbled at the close after weak manufacturing data in China fuelled investors' worries about the world's second-largest economy.

At the closing bell, the Dow Jones Industrial Average slumped 470 points, or 2.8 per cent, to 16,058. The S&P 500 declined 3 per cent and the Nasdaq Composite fell 2.9 per cent.

Shares in Europe and Asia posted losses. The price of oil, which had rallied in recent days, slumped.

After calmer sessions on Friday and Monday, traders and investors said they were hoping last week's volatility had passed. However, signs of turbulence returned Tuesday.

"Clearly this is showing us we're not out of the woods by any means," Jonathan Corpina, senior managing partner at Meridian Equity Partners, said. He added that the weak manufacturing data in China triggered the steep declines.

"Under normal circumstances maybe our market wouldn't be so volatile and take this information so severely, but this shows our market is still fragile," he said, noting that the mood on the floor of the New York Stock Exchange was "here we go again."

In the past couple of weeks, stocks, currencies and commodities have swung dramatically on signs of a slowdown in Chinese growth. Disappointing economic data out of the world's second-largest economy, as well as the country's devaluation of its currency, have exacerbated concerns.

"A lot of this is the continuation of themes we've seen over the past couple weeks," Joe Smith, senior market strategist at CLS Investments, said. Though he said he believes the sharp market swings will eventually subside, he doesn't expect the volatility to end soon.

"It's not something we think will continue long-term, but we should probably see some level of volatility over the next few months," he said.

Still, newly released economic data in the US has remained rather buoyant. Last Friday, the Commerce Department said US consumer spending rose in July, and last Thursday a reading of gross domestic product showed a stronger second quarter expansion than initially estimated.

As a result, the extent of the spillover of China's stock market declines to the US has some investors scratching their heads.

"For us, it's a question of 'Are we missing something?'" Stephen Freedman, senior investment strategist at UBS Wealth Management Americas, said. "Is this downward volatility telling us something about the fundamental picture in the US that we're not seeing?"

So far, Mr Freedman said he sees no change in US fundamentals and remains relatively upbeat about the long-term performance of US stocks. He added that he was encouraging clients to use this as an opportunity to invest in sectors such as technology and energy rather than have alarm bells go off.

Commodities and stocks around the world have swung sharply in the weeks since China devalued the yuan, interpreted by some as a sign of Beijing's concern about slowing growth.

The Stoxx Europe 600 closed 2.7 per cent lower Tuesday. The Shanghai Composite fell nearly 5 per cent before ending the day down 1.2 per cent. Hong Kong's Hang Seng Index fell 2.2 per cent and Japan's Nikkei lost 3.8 per cent.

On Tuesday, the New York Stock Exchange operator NYSE Group invoked "Rule 48" for the stock-market open, which relaxes some trading rules in an attempt to ensure a smooth opening. The rule is instituted when trading ahead of the open is especially volatile.

Stock indexes around the world suffered their biggest monthly losses in years in August. The Stoxx Europe 600 had its largest one-month percentage decline since August 2011. The Dow fell 6.6 per cent, representing its biggest monthly percentage decline since May 2010. The Shanghai Composite fell 12.5 per cent, notching its third straight month of declines.

On Tuesday, China's official manufacturing purchasing managers index for August fell to 49.7, from 50.0 in July, marking its lowest level since August 2012. A number below 50.0 implies a contraction.

Separately, the Caixin manufacturing purchasing managers index, a gauge of nationwide manufacturing activity, fell to more than a six-year low in August, according to Caixin Media and research firm Markit.

"We believe that the clock is ticking toward further negative surprises, " Rabobank strategist Michael Every said about the data in a note to clients.

He said that policy responses from China aimed at encouraging stability had so far failed.

Chinese authorities have been trying to stabilise the domestic stock market since late June, cutting interest rates for the fifth time since November and pledging to support the market by buying stocks. More recently, Beijing has stepped up a crackdown on what they are labelling as securities violations.

Christine Lagarde, managing director of the International Monetary Fund, said Tuesday that the organisation expects global economic growth to weaken and that Asia risks slowing further because of the recent volatility in financial markets.

"Asia as a region is still expected to lead global growth," Ms Lagarde said in a speech at the University of Indonesia. But even in Asia, the pace "is turning out a little bit slower expected -- with the risk that it may even slow further given the recent spike in global risk aversion and in financial market volatility."

The euro, which in recent months has tended to do well during times of market stress, was recently 0.4 per cent higher against the US dollar at $US1.1269.

The US oil benchmark ended down 7.7 per cent at $US45.41 a barrel after oil prices had surged over the previous three trading sessions. Gold rose around 0.7 per cent to $US1,140.00 a troy ounce.

Later this week, the European Central Bank is scheduled to hold its regular monetary policy meeting. Analysts expect President Mario Draghi to get questions about what recent market volatility could mean for Europe and the ECB's bond-buying program.

On Friday, monthly US non-farm payroll figures could provide further hints on the timing of a US interest rate rise.

Market turmoil has led some investors and analysts to push back their expectations for when the US Federal Reserve will start to raise rates from rock-bottom levels.