Stock markets around the world fell sharply Monday after U.S. President Donald Trump threatened to increase tariffs on imports from China, but by mid-afternoon North American stocks were paring their losses.

Investors started the new week on a downbeat tone after Trump said via Twitter that he planned to raise tariffs on imports from China to 25 per cent from 10 per cent as of Friday. Complaining that trade talks with China were moving too slowly, he also said he would impose tariffs on $325 billion US worth of products from China, accounting for all of its exports.

He said: "The trade deal with China continues, but too slowly, as they attempt to renegotiate. No!"

Beijing said it is "trying to get more information" after Trump's announcement over the weekend that he would raise tariffs on $200 billion of Chinese imports from 10 per cent to 25 per cent on Friday, said a Foreign Ministry spokesman, Geng Shuang. Trump's threat was seen as an effort to intensify pressure on China to agree to a deal that would be to Trump's liking.

Markets had been convinced the world's two largest economies were on track to resolve their differences and analysts warned of further volatility ahead because of the move.

"It's a significant change in the president's tone," said Timothy Keeler, a partner at the law firm Mayer Brown and former chief of staff for the U.S. Trade Representative. "It certainly increases the possibility that you'll have no deal."

Stocks bounce back after steep dropoff

There was a sharp dropoff in stocks in North America. The S&P had the steepest drop since March as stocks exposed to China, including Apple and Caterpillar, took a hit. By the close the S&P had recovered somewhat as investors hoped for better news once trade talks resume this Wednesday.

The S&P fell 13 points on the day to 2,932. The benchmark Dow index was down 500 points at the opening, but by the close had reduced losses to 66 points, ending at 26,438.

Toronto's TSX joined the slide, falling steeply in early trading but recovered on the back of oil prices to close down less than a point to 16,493.

Commodities also took a hit from Trump's aggressive trade talk.

West Texas Intermediate, the main North American crude contract, fell three per cent overnight. However, the Saudis moved to cut the price of oil to the U.S. and raise the price for Asian and European customers, a signal that Riyadh is in no hurry to boost oil supply ahead of an OPEC meeting next month.

By midday, WTI was off just 40 cents to $61.53 US a barrel, then it bounced higher in the afternoon to gain 72 cents to $62.66 US after renewed tensions between the U.S. and Iran. Brent crude was also up 69 cents at $71.54.

Trump's remarks knocked sentiment immediately in Asia, where the Shanghai Composite index closed 5.6 per cent lower at 2,906.46 after plunging more than six per cent earlier in the session. Hong Kong's Hang Seng index sank 2.9 per cent to 29,209.82.

That selling carried through into the European session.

In Europe, the CAC 40 in France was down two per cent at 5,441 while Germany's DAX skidded 1.8 per cent to 12,187. London's markets were closed for a bank holiday.

Talks resume this week

Trump's comments in tweets Sunday came as a Chinese delegation was due to resume talks in Washington on Wednesday aimed at resolving a tariffs battle that has rattled world markets.

"Escalation like this means we are certainly further away from the end of this negotiation process than we thought," said Arthur Hogan, chief market strategist at National Securities Corp.

"The three things that have been driving this market higher this year have been the pivot by the Fed, better than feared earnings, and the belief that we would get a trade deal done sooner rather than later."

The Wall Street Journal, citing unidentified sources, said China's government was considering cancelling this week's talks. But a Chinese Foreign Ministry spokesman, Geng Shuang, said Monday that the delegation was still planning to go. He would not say exactly who might attend the talks.

The Chinese could refuse to negotiate at gunpoint and decide to walk out on the trade talks, both sides have invested too much political capital in the negotiations to let this happen. - Raoul Leering, ING's head of international trade analysis

Though Trump's tweet has weighed on market sentiment on Monday, there is still a prevailing view that a deal will get done.

"Although Trump's strategy is risky, because the Chinese could refuse to negotiate at gunpoint and decide to walk out on the trade talks, both sides have invested too much political capital in the negotiations to let this happen," said Raoul Leering, head of international trade analysis at ING.

Elsewhere in Asia on Monday, the A-share index on China's smaller market in Shenzhen plummeted 7.4 per cent. Japan's markets were closed for a holiday, but the future contract for the benchmark Nikkei 225 index lost 2.4 per cent.

'Dangerous game'

Shares also fell sharply in Taiwan, Singapore, Australia and Indonesia.

Investor Warren Buffett says if the U.S. has a full-blown trade war with China, it will be bad for the entire world.

Buffett appeared on CNBC Monday with Berkshire Hathaway Vice Chairman Charlie Munger and Microsoft co-founder Bill Gates, who serves on Berkshire's board.

Buffett said Trump is making a "nuclear threat" that may bring the Chinese to the table. But it's impossible to predict the outcome because both countries' leaders are used to getting their way.

"It's a dangerous game," Buffett said.