Global markets have dropped sharply after China retaliated against Donald Trump’s decision to impose tariffs on steel and aluminium, fuelling fears of an all-out trade war between the world’s two largest economies.

Hours after the US president announced moves to tackle what he believes are unfair trade practices, China signalled it would hit US goods such as pork, apples and steel pipe with higher duties.

China’s commerce ministry urged Washington to negotiate a settlement as soon as possible but set no deadline.

A ministry statement on Friday said the higher US tariffs “seriously undermine” the global trading system.

“China doesn’t hope to be in a trade war, but is not afraid of engaging in one,” the statement said. “China hopes the United States will pull back from the brink, make prudent decisions, and avoid dragging bilateral trade relations to a dangerous place.”

The news sent the Dow Jones Industrial Average down 724 points or 2.93% on Thursday, and the rout continued in Asian markets. The Nikkei 225 in Toyko closed 4.51% lower, while shares in Hong Kong fell 2.45%, the CSI300 in Shanghai lost 2.86% and the Kospi in Seoul was down 3.37%. In Australia, which exports more iron ore to China than any other country, the ASX200 benchmark index was off nearly 2%.

In Europe, the FTSE 100 was down nearly 1% at 6883 in mid-morning trading, a new 15 month low and pushing the leading index firmly into correction territory, down 10% since its recent peak in late January.

Germany’s Dax and France’s Cac have both dropped by about 1.8%. Despite the US move on China, the EU is one of the regions which has been given a temporary exemption from the steel tariffs.

At the European summit in Brussels, the UK prime minister, Theresa May, said she welcomed the exemption and was working with other EU leaders to try and make it permanent. She said: “We will be talking about what the next steps might be. I have stayed on to talk about these next steps because the steel industry is hugely important to the UK and the British government and I want to ensure that steel workers and their jobs are properly safeguarded.”

In response to the US tariffs on China, the country’s foreign ministry suggested soybeans, airplanes, cars and cotton could be targeted.

Goods targeted for possible higher Chinese tariffs include wine, apples and ethanol, which would hit agricultural areas where voters supported Trump in the 2016 presidential election.

The Chinese government could also target US technology companies that manufacture products in China, such as Apple, in the hope those firms would pressure Washington to back down, said Victor Shih, a professor of political economy at University of California, San Diego.

The ministry said China bought about $1bn (£700m) worth of those goods last year. They would be hit with a 15% tariff increase, mirroring the US duty hike of 15% on aluminum.

A second group of products targeted for a possible 25% tariff, mirroring the higher American charge on steel, includes pork and aluminum scrap, according to the ministry.

“It’s already a trade war. And this war is started by the US,” Cheng Dawei, a professor of international trade at Renmin University in Beijing.

The Chinese government is still consulting with industry leaders on other possible retaliatory measures, she added, while China will also “react on other multilateral platforms, such as World Trade Organisation and the G20”.

Further tariffs are likely, with the Chinese president, Xi Jinping, recently delivering a nationalistic speech at the close of a parliamentary session where he secured a removal of term limits on his office.

“The US action demonstrates how much damage Xi Jinping has done to the US-China relationship, he completely rejected Obama’s outstretched hand and now there’s broad support in Washington that something had to be done,” said Ely Ratner, a senior fellow at the Council on Foreign Relations.

Additional reporting by Xueying Wang