U.S. stocks sink after China index plunges nearly 7%

U.S. stocks dropped sharply in early trading Monday after a plunge in China triggered by weak Chinese manufacturing data and escalating tensions in the Middle East. The Dow Jones industrial average sank 2%. China's main index plunged lost nearly 7%, forcing an emergency trading suspension. European indexes fell between 2% and 4%.

The Dow Jones industrial average sank 384 points, or 2.2%, to 17,044 as of 10:09 a.m. Eastern time. The Standard & Poor's 500 index lost 41 points, or 2%, to 2,002. The Nasdaq composite gave up 133 points, or 2.7%, to 4,874.

The Shanghai Composite Index dived 6.9% to its lowest level in nearly three months. The drop led the Shanghai and Shenzhen stock markets to halt trading for the remainder of Monday to avert steeper falls, the official Xinhua News Agency said.

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Chinese authorities have been trying for months to restore confidence in the country's stocks after a plunge in June rattled global markets and prompted a panicked, multibillion-dollar government intervention. Concerns about China's economic slowdown were revived by weak manufacturing data released Monday, along with Middle East tensions, which pushed up oil prices.

Huang Cengdong, an analyst for Sinolink Securities in Shanghai, said selling accelerated as investors tried to lock in trades before trading was halted. He expects further turmoil ahead of corporate earnings reports.

The DAX index in Germany, whose export-led economy is sensitive to the fortunes of China, tumbled 4.2%. Britain's FTSE 100 fell 2.1% while France's CAC 40 dropped 2.4%.

The Caixin/Markit index of Chinese manufacturing, which is based on a survey of factory purchasing managers, fell to 48.2 points in December from 48.6 the previous month, marking contraction for the 10th straight month. On Friday, an official manufacturing index also showed a persistent contraction in factory activity despite Beijing's stimulus measures.

Saudi Arabia said Sunday that it was severing diplomatic relations with Iran, a development that could potentially threaten oil supply. The world's largest oil supplier executed a prominent Shiite cleric that prompted protesters to set fire to the Saudi Embassy in Tehran and Iran's top leader to criticize Saudi Arabia.

"Oil markets will be concerned that this could be an incremental step in a deteriorating political situation that might ultimately threaten world oil supply," Ric Spooner, chief analyst at CMC Markets, said in a commentary.

Benchmark U.S. crude added $1, or 2.8%, to $38.04 per barrel in New York Mercantile Exchange. Brent crude, used to price international oils, rose $1.60, or 4%, to $38.86 a barrel in London.

Japan's Nikkei 225 tumbled 3.1% and Hong Kong's Hang Seng retreated 2.7%. South Korea's Kospi closed 2.2% lower. Stocks in Australia, Taiwan and Southeast Asia were also lower.

The dollar weakened to 119.19 yen from 120.23 yen. The euro fell to $1.0822 from $1.0858.

Bond prices rose. The yield on the 10-year Treasury note fell to 2.21% from 2.27%.

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