The Australian share market has lost as much as $60 billion in value as a fresh crash in Chinese stocks drives heavy falls around Asia.

Within 15 minutes of trade opening, the benchmark ASX 200 index was down 2.6 per cent at 5,082, while the broader All Ordinaries matched that slide to 5,091.

However, it seemed that a few hardy 'bargain hunters' moved in after that, pushing the market back towards a more moderate 1.8 per cent slide by 11:18am (AEST), before a disastrous Chinese stock market open saw Australia's main indices head to an even worse slump just shy of 4 per cent.

If the market closed at those levels it would be the worst declines since the US debt ceiling and ratings downgrade crisis of August 2011.

Key points: ASX 200 falls 4.1 per cent to 5,001, a two-year low

ASX 200 falls 4.1 per cent to 5,001, a two-year low Around $64 billion wiped off the market's value

Around $64 billion wiped off the market's value Shanghai composite index falls 8.5 per cent

Shanghai composite index falls 8.5 per cent Wall St down more than 3 per cent on Friday

The Australian share market is already at two-year lows, and is testing a key psychological barrier at 5,000.

By 3:25pm the ASX 200 was off 192 points to 5,023 and the All Ordinaries index was also down 3.7 per cent to 5,033.

The ASX 200 had already lost 1.4 per cent on Friday to close at 5,215 after a key index showed Chinese manufacturing had its sharpest contraction last month in more than six years.

Those manufacturing figures triggered a 4.2 per cent slump in the main Shanghai market and 5.4 per cent dive in Shenzen on Friday, defying recent government efforts to stem the losses with stock purchases and selling bans on some shareholders.

However, China's share falls were far from finished, with the main Shanghai index plunging almost 9 per cent just after 3:00pm (AEST) today and the secondary Shenzen market down slightly less.

Given that individual stocks on China's markets are only permitted to fall up to 10 per cent in one day, those losses are about as bad as the mainland markets can get.

Some investors had hoped that China's central bank would cut reserve requirements for banks over the weekend to boost lending, but it did not.

The Chinese government did move to allow pension funds to invest in the stock market, but that appears to have left traders dissatisfied.

Around the region, Tokyo's Nikkei was down 4.3 per cent and Hong Kong's Hang Seng was off 5.7 per cent.

US market falls back to 2014 levels

Last week's Chinese weakness fed through into steep falls on Wall Street and in Europe on Friday night.

Wall Street's benchmark S&P 500 index dropped 3.2 per cent, nearly matched by the blue chip Dow Jones Industrial Average with its 531-point dive to 16,460, its lowest close since October last year.

The Dow is now in a technical 'correction', where share prices have fallen at least 10 per cent from their most recent peaks.

Added to the China concerns is a growing fear about the potential fallout from the first US interest rate rise in almost a decade, which many analysts expect next month and most predict will happen this year.

Although there is a growing number of analysts predicting that the Federal Reserve will hold off raising rates while markets remain in turmoil.

The Australian Stock Report's head of research Chris Conway said China's recent currency devaluations have investors concerned that the world may slip into deflation.

"If that takes hold amid an environment where the central banks have no more bullets in the gun, then seemingly crazy predictions like the Dow Jones at 5,000 might not seem so crazy after all," he warned.

"Deflation is a market killer at the best of times, but if central banks aren't able to do things like cut interest rates – because they are already so low - then the situation could become diabolical.

"Whilst we're certainly not there yet, traders and investors need to factor it into their thinking. Right now, there is clearly some panic selling occurring and there is little in the way of technical support below the current market price."

London's FTSE was off 2.8 per cent on Friday, Germany's DAX 3 per cent and France's CAC 3.2 per cent.

'Carnage' for Australian stocks

The local market has been a sea of red throughout the day, with CMC Markets chief strategist Michael McCarthy saying it was "carnage out there".

"Nobody's escaping in this sell-off this morning," he told ABC radio's The World Today program.

"The sellers are here in numbers and they're pushing the market lower on high volumes, suggesting there's a lot of commitment from the sellers in the market today."

The major banks were all down between 3-5 per cent, with Westpac the worst.

BHP Billiton was down 4.7 per cent to $22.97 - falling below $23 for the first time since November 2008, during the height of the financial crisis - while Rio Tinto was off 5.4 per cent.

Fortescue Metals, which today posted an 88 per cent drop in its full-year net profit to $US317 million, was especially hard hit, slumping 14 per cent to $1.65.

Electronics retailers Harvey Normand and JB Hi-Fi were down around 3.6 and 5 per cent respectively, while department store Myer was off 3 per cent.

Qantas was 4 per cent lower, despite last week's return to profit and continued weakness in oil prices that will maintain downward pressure on its fuel bill.

Oil and gas producer Woodside was down nearly 5 per cent to $30.00 - its lowest level since November 2011 - on those falling oil prices.

Fellow energy producers Oil Search, Origin and Santos were off 5.5, 5 and 9.5 per cent respectively.

Even more 'defensive' stocks were being sold down: Telstra was down 2.5 per cent to $5.92, while supermarket heavyweights Woolworths and Wesfarmers were off 3.7 and 2.2 per cent respectively.

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The ASX 200 index fell 1.7 per cent on Thursday and 1.4 per cent on Friday last week, adding to today's slump.

The Australian dollar had also fallen about 1.5 per cent to 72.1 US cents by 12:48pm (AEST).