Oil prices plunged nearly $2 per barrel and global stocks fell for a third consecutive session on Thursday as shrinking manufacturing in China and in the two largest economies of the euro zone fuelled worries about global growth.
U.S. Treasuries prices and the dollar rose as risk aversion increased, although fresh evidence that the U.S. labour market continues to strengthen tempered investors' bid for safety.
China, the world's second-biggest economy and a key driver of growth, said its manufacturing sector shrank for a fifth straight month in March. A senior government economist said the economy is facing more downward pressure than had been expected.
In the euro zone, a recession seemed unavoidable after Germany and France reported unexpectedly sharp declines in manufacturing activity. Britain added to the gloom with a steeper-than-forecast fall in retail sales.
Fears that an economic slowdown could dent demand for energy drove U.S. crude oil prices down to a two-month low of $104.93 a barrel, a fall of $1.92, or 1.79 percent.
Some Wall Street indexes fell more than half a percentage point, although the S&P 500 retained its gain of 10.7 percent in the year to date.
The stock market has been residing in this fantasy land, ignoring the bad data and only looking at the good ones, but it is now clear that Europe is entering a recession with Germany probably joining, and China could have a hard landing, said James Dailey, portfolio manager at TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.
We are not going to have a collapse like the '08, but there is a good chance that we have experienced the new highs and the market is starting to roll over to what may be the start of a bear market, he added.
The Dow Jones industrial average <.DJI> closed down 78.48 points, or 0.60 percent, to 13,046.14. The Standard & Poor's 500 Index <.SPX> lost 10.11 points, or 0.72 percent, to 1,392.78. The Nasdaq Composite Index <.IXIC> dropped 12.00 points, or 0.39 percent, to 3,063.32.
World stocks measured by the MSCI All-Country World Index <.MIWD00000PUS> fell 0.95 percent. Earlier in the week, the index had closed near its highest levels since July.
In Europe, the FTSEurofirst 300 index <.FTEU3> ended 1.12 percent lower, breaking a key support level at 1,091, which represents its February high. Miners were among the biggest decliners on concerns about falling Chinese demand for metals.
For mining shares it has big implications; the Chinese data means there will be a reduction in resource demand if construction slows in the country, said Darren Sinden, senior sales trader at Silverwind Securities.
The Chinese PMIs are lending weight to a case of a hard landing, and if Germany is the better part of Europe and it cannot grow, the situation for the markets will be difficult.
U.S. Treasury bond prices rose for a third consecutive day as investors sought safety, although they trimmed part of their gains after data showed U.S. claims for unemployment benefits fell to a four-year low last week.
Benchmark 10-year Treasury notes were trading 3/32 higher in price to yield 2.28 percent, down from 2.3 percent late Wednesday.
Encouraging jobs data also boosted the dollar against major trading-partner currencies, many of which are direct beneficiaries of the Chinese economic boom. The greenback was 0.1 percent higher, as measured by the U.S. Dollar Index <.DXY>.
The euro weakened 0.16 percent against the dollar, to $1.3187.
When you get numbers like these out of the euro zone it definitely puts the growth outlook into question and points to a mild recession, said Niels Christensen, currency strategist at Nordea in Copenhagen.
Gold prices slid to their lowest since mid-January, pressured by the stronger dollar and declining expectations for further U.S. liquidity injections, which usually find their way into the gold market.
Spot gold was down 0.39 percent to $1,643.40 an ounce. The metal earlier hit a low of $1,627.68 - its weakest since January 13.
(Additional reporting by Angela Moon and Jessica Mortimer; Editing by Theodore d'Afflisio and Dan Grebler)