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Wall Street has continued the rout on global share markets, with the Dow Jones, S&P 500 closing down more than 1.5% and Nasdaq down 2%.

It followed sharp falls in China, where trading on the main stock markets was halted early after indexes tumbled 7%.

A survey indicating China's manufacturing sector contracted again last month was blamed for the falls.

Other Asian markets also fell, while in Europe, the FTSE 100 closed down 2.6% and Germany's Dax index dropped 4.3%.

Meanwhile, news that Saudi Arabia had broken off diplomatic ties with Iran sent oil and gold prices higher.

On Wall Street, all 10 major S&P sectors were lower, led by the 2.4% fall in the technology sector. Bank stocks were also hard hit, with JP Morgan down 3.65%.

"Those are violent New Year fireworks," said Andre Bakhos, managing director at Janlyn Capital. "That's quite a way to start the day off."

China weakness

Earlier on Monday, trading on China's Shanghai and Shenzhen stock exchanges was halted for the first time under new "circuit breaker" rules, which are designed to curb market volatility.

The share price falls came after more signs of trouble in the world's second-largest economy.

The Caixin/Markit purchasing managers' index slipped to 48.2 in December, marking the 10th consecutive month of shrinking factory activity in the sector. A reading below 50 indicated contraction.

Some analysts also attributed the decline in share prices to the imminent end of a six-month lockup period on share sales by major institutional investors, a policy implemented to shore up indexes. Big shareholders may start dumping shares once the ban is lifted on Friday.

Huang Cengdong, an analyst for Sinolink Securities in Shanghai, said: "The market will not improve because there will be heavy selling in the near future."

Monday's sell-off in China had a knock-on across the region. Japan's Nikkei 225 tumbled 3.1% and Hong Kong's Hang Seng retreated 2.6%.

Image copyright Reuters

Analysis: Karishma Vaswani, Asia business correspondent

There's nothing like the herd mentality to get things started for the new year. Retail investors in the Chinese stock market are often driven by sentiment and tend to follow the crowd.

When they hear of some bad news from brokers or their friends, and other people start selling, they start selling too.

Falling prices attract more people to dump their stocks, and although shares are still above their lows, authorities will be keen to avoid the kind of share market crash we saw last summer.

Read Karishma's full analysis here.

"Welcome to 2016, though you'd be forgiven for thinking the markets were back in August 2015 with China causing some early New Year issues," said Spreadex analyst Connor Campbell.

And Alastair McCaig, market analyst at IG, said: "Anyone hitting the trading floor expecting a calm and quiet start to 2016 was given a rude surprise as Asian chaos affected European markets."

Markets were also rattled by growing tensions between Middle East powerhouses Saudi Arabia and Iran over the execution of Shia cleric Nimr al-Nimr.

The execution in Saudi Arabia led to protests in Tehran. Saudi has cut diplomatic ties with Iran and given diplomats 48 hours to leave.

Iran's supreme leader has warned Saudi Arabia it would face "quick consequences" for the execution.

Image copyright Reuters Image caption Saudi Arabia is the world's biggest oil exporter

'Supply glut'

Fearing further upheaval in the already volatile Middle East, the US has urged regional leaders to try to ease tensions.

The price of Brent crude jumped more than 3% at the start of the day on the back of heightened tensions, but then fell back sharply after US stock markets opened. In late afternoon trading, Brent was down 1% at $36.96 a barrel, while US crude was down 1.4% at $36.52.

Analysts said the underlying trend of oversupply would continue to weigh on prices over the longer term.

"Unless we see a convincing drop in oil output from these two nations, and the broader oil-producing community, the supply glut issue will persist, which means oil prices would remain under pressure for a longer period," said Bernard Aw at IG Markets in Singapore.

Oil prices are down by two-thirds since mid-2014, with analysts estimating that producers are pumping between 0.5 million and two million barrels of oil every day in excess of demand.

Worries about the impact of Middle East tensions were underlined in the gold price, which rose more than 1% on Monday to $1,070.20 an ounce.

Gold is frequently seen as an alternative investment during times of geopolitical and financial uncertainties. The gold price lost 10% last year.

Another traditional haven is the Swiss franc, which gained about 0.8% against both the dollar and the euro in early trading on Monday.