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US equity markets dropped sharply on Tuesday as traders prepared for an escalation of the US-China trade war.

Shares fell in companies with strong links to China such as AMD, Nvidia, L Brands, and Arista Networks.

Trump "may well be making a deal seem further away in order to make the achievement seem all the more impressive when it comes," an analyst said.

After months of calm in markets, fears about an escalation of the US-China trade war roared back this week as President Donald Trump's tweets about tariffs on China sent investors into a sell-off frenzy.

World equity and oil markets slumped Tuesday and the stock market's "fear gauge," known as the VIX, spiked after the US president on Monday threatened to raise tariffs on $200 billion worth of Chinese goods to 25% from 10% and slap new 25% tariffs on $325 billion worth of Chinese goods.

Two of the stocks caught in the crossfire were AMD and Nvidia. Both stocks fell by about 3%, as China is an important gaming market for the chipmakers. Shares in L Brands also slid 5% — the owner of Victoria's Secret and PINK described China as "an extremely important market" in April. Similarly, Aristan Network fell 4% as the cloud-networking group flagged that US tariffs on Chinese imports could increase its costs and reduce its sales in its latest earnings report.

On Monday, US Trade Representative Robert Lighthizer confirmed Trump's threat from a day earlier, saying the tariff increase was set to take effect Friday at 12:01 a.m. ET.

Investors are now pondering what economic damage might result after a months-long truce in the conflict.

"One cannot but sense that Mr. Trump is playing us a little," said Neil Wilson, the chief market analyst for Markets.com. "He may well be making a deal seem further away in order to make the achievement seem all the more impressive when it comes."

Here's the market roundup as of 4 p.m. ET:

The Dow Jones Industrial Average closed down almost 500 points or 1.9%, the S&P 500 shed 48 points or 1.6%, and the Nasdaq fell 153 points or 2%.

closed down almost 500 points or 1.9%, the shed 48 points or 1.6%, and the fell 153 points or 2%. European stocks were broadly lower, with Britain's FTSE 100 down 1.7%. The Euro Stoxx 50 was lost 1.8%, while Germany's DAX and France's CAC 40 were both weaker 1.6%.

down 1.7%. The was lost 1.8%, while Germany's and France's were both weaker 1.6%. Asian indexes regained ground after heavy losses Monday. The Shanghai Composite closed up 0.7%, and Hong Kong's Hang Seng gained 0.5%. Japan's Nikkei , which reopened after Golden Week, shed 1.6%.

closed up 0.7%, and Hong Kong's gained 0.5%. Japan's , which reopened after Golden Week, shed 1.6%. Oil prices trended lower as both Brent and West Texas Intermediate crude slid by about 1.5%.

"Over the course of the last week or so we have seen ... an erosion in commitments by China," Lighthizer told reporters, according to Reuters. "That in our view is unacceptable."

"We're not breaking off talks at this point," he added, saying, however, that for now, "come Friday there will be tariffs in place."

Markets eased off lows after China confirmed that its top negotiator, Vice Premier Liu He, would travel to the US this week to continue trade talks, according to Bloomberg.

"What has become clear is that there is still a lot of work to be done before a trade deal between the world's two largest economies is achieved," said Jasper Lawler, the head of research at London Capital Group.

"That doesn't mean it's impossible, just that it could take longer than the two sides were initially letting on and the market was pricing in," he added.

"Amid such highly sensitive market conditions, volatility is expected to be the order of the day," said Han Tan, a market analyst at FXTM. Another batch of tariffs, he said, could "trigger another selloff in riskier assets, as investors try and anticipate what higher barriers to trade may do for the already moderating global growth outlook."

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