U.S. stocks closed sharply lower Friday, with all major indexes logging their worst day in more than 2 ½ months, after a downbeat round of economic data in Europe and the U.S. stoked global growth fears while a closely watched measure of the yield curve inverted for the first time since 2007, triggering recession worries.

All benchmarks had their biggest one-day drop since Jan. 3 with the Dow Jones Industrial Average DJIA, -1.92% tumbling 460.19 points, or 1.8%, to 25,502.32. The S&P 500 index SPX, -2.37% was off 54.17 points, or 1.9%, to 2,800.71 and the Nasdaq Composite Index COMP, -3.01% declined 196.29 points, or 2.5%, to 7,642.67.

For the week, the blue-chip index fell 1.3%, the S&P 500 lost 0.8% and the Nasdaq shed 0.6%.

The Cboe Volatility Index VIX, +6.40% , Wall Street’s so-called fear index, spiked 24% to 16.96, underscoring the jittery market sentiment.

What drove the market?

Global-growth concerns were brought to the fore after a round of March purchasing-managers-index readings pointed to a further slowdown in activity across the eurozone.

Those fears were compounded when data showed growth in the U.S. manufacturing sector slowed to a 21-month low in March, according to the flash reading of IHS Markit’s purchasing manager’s index. The manufacturing index fell to 52.5 from 53 in February and below the 53.5 expected by economists in a FactSet survey.

U.S. wholesale inventories also rose 1.2% in January after a revised estimate of a 1.1% increase in December, the Commerce Department said.

However, existing-home sales hit an 11-month high in February, the National Association of Realtors said. New homes were sold at a seasonally-adjusted annual rate of 5.51 million, an 11.8% increase over the previous month.

As equities came under pressure, investors bought bonds, forcing the spread between the 3-month Treasury bill and the 10-year note to invert for the first time since 2007. A so-called yield curve inversion, where the rate of longer-dated debt falls beneath its shorter-dated counterparts, is widely viewed as a fairly accurate recession indicator, and the spread between three-month and 10-year yields is the most closely followed by economists.

Read:The yield curve inverted — here are 5 things investors need to know

U.S.-China trade relations remained in the headlines, after President Donald Trump said, “I think we’re getting very close” to a trade deal with China. “That doesn’t mean we get there, but I think we’re getting very close,” he said on Fox Business Network.

The comments come just days after the president warned markets that tariffs on Chinese goods may remain “for a substantial period of time,” even after a trade deal is reached, to ensure Chinese compliance with its terms.

What were analysts saying?

“The bond market is driving the equity market today,” Randy Frederick, vice president of active trading and derivatives told MarketWatch. “Today’s weakness clearly has a lot to do with the yield curve, as the 10-3 went negative.”

After weak economic data helped send German government bond yields negative Friday, “it tends to make it difficult for our Treasurys to stay higher, and it feed the narrative that we have slowing global growth,” he added.

Kevin Giddis, head of fixed income capital markets at Raymond James, said that the market is at a juncture where investors need to pay close attention to risk assets such as stocks as “those are the ones that crack first when the overall expectation is that there is a recession approaching.”

He also noted that the Fed Funds Futures Probability Index is pointing to increasing odds of a rate cut as the year progresses, suggesting that confidence in the economy isn’t that strong.

“The Fed has set the tone for the markets, and if you trust their ability to ‘see around corners,’ then you will continue to maintain a risk-off position,” said Giddis in a note to clients.

Which stocks were focus?

Shares of Tiffany & Co. TIF, +0.12% rose 3.2%, after the luxury jewelry retailer reported fiscal fourth-quarter profits that beat Wall Street expectations, but missed forecasts for same-store sales growth.

Nike Inc. NKE, +8.76% shares slumped 6.6% even after the company reported fiscal third-quarter profits that beat analyst expectations and revenue that was in line with forecasts. The stock has risen 19% year-to-date.

Shares of Hibbett Sports Inc. HIBB, -3.17% rallied 20% after the sporting-goods store operator reported same-store sales growth of 3.8% versus the flat growth expected by analysts. The firm also issued guidance for the full 2020 fiscal year that surpassed forecasts.

GameStop Corp. GME, -4.92% shares reversed direction to fall 1% after the videogame retailer announced late Thursday that retail veteran George Sherman would assume the chief executive officer role at the firm.

What were other markets doing?

European equity markets were pressured, with the Stoxx 600 Europe index SXXP, +0.55% sliding 1.2%. Asian stock markets closed modestly higher, with Japan’s Nikkei, Hong Kong’s Hang Seng Index and China’s Shanghai Composite Index all edging up.

In commodities markets, crude oil prices US:CLK9 retreated, while the price of gold US:GCJ9 settled higher, and the U.S. dollar DXY, +0.40% edged up.

—William Watts contributed to this article