Global stocks fell 2 percent Thursday as data showing Chinese, European and U.S. manufacturing activity had slowed further underscored worries about weaker global growth. Crude oil and other commodities also sank.
The disappointing data came just a day after the Federal Reserve extended its monetary stimulus program aimed at boosting the U.S. economy.
U.S. stocks posted their worst day in three weeks, extending losses after Goldman Sachs recommended shorting the benchmark S&P 500 index.
The U.S. dollar posted its biggest gain in more than three months against major currencies. The Fed's move disappointed foreign exchange investors who had hoped for a more aggressive policy.
Business activity across the eurozone shrank for a fifth straight month in June and Chinese manufacturing contracted, while weaker overseas demand slowed U.S. factory growth, surveys showed.
The data clouded the outlook for the world economy and compounded fears that Europe's debt crisis, coupled with slower growth in the United States and Asia, would hurt economies worldwide.
"Markets are worried about the slowdown, not only in U.S. figures but all around the world," said Jeffrey Saut, chief investment strategist at Raymond James Financial in St. Petersburg, Florida. "The (stock) market was extremely overbought coming into this week, and the news gave it an excuse to sell off."
The Dow Jones Industrial Average dropped 250.82 points, or 1.96 percent, to end at 12,573.57. The Standard & Poor's 500 Index was down 30.18 points, or 2.23 percent, at 1,325.51. The Nasdaq Composite Index was down 71.36 points, or 2.44 percent, at 2,859.09.
World stocks, as measured by MSCI's global equity index , declined 1.8 percent and European shares ended down 0.5 percent.
On Wednesday, the Fed chose to extend its bond-buying program, dubbed "Operation Twist," rather than implement more extensive stimulus, as some had hoped.
The U.S. central bank made its decision after lowering forecasts for growth and employment in the world's largest economy in 2012 and 2013. It said it would consider more stimulus measures if the situation worsened.
In Europe, preliminary manufacturing and service sector data across the 17-nation euro area showed the downturn in the region was becoming entrenched as falling new orders and rising unemployment hit business confidence.
The survey data showed that Germany's private sector shrank in June for the second consecutive month, with manufacturing activity hitting a three-year low.
A similar survey of private sector activity in China, compiled by HSBC, found its factory sector had shrunk for an eighth straight month in June on weaker demand for exports.
Economic growth in the world's most populous nation is widely expected to have slowed for a sixth consecutive quarter in April through June as the country feels the impact of the euro area debt crisis and property controls weigh on domestic demand.
In its note, Goldman Sachs cited Thursday's report from the Philadelphia Federal Reserve Bank, whose mid-Atlantic factory index registered a minus 16.6, an unexpected contraction in the region's business activity in June.
"We are recommending a short position in the S&P 500 index with a target of 1,285" (roughly 5 percent below levels at the time, Goldman Sachs analysts said in the note.
Energy and materials shares led declines on the S&P 500, with the S&P energy sector index down 4 percent and the materials index down 3.3 percent.
In the oil market, Brent crude tumbled for a fourth session to end at the lowest level in 18 months. August Brent crude closed at $89.23 a barrel, dropping $3.46, or 3.7 percent, and posted the lowest settlement for front-month Brent since Dec. 1, 2010.
On the New York Mercantile Exchange, crude for August delivery closed at $78.20, down $3.25, or 4 percent, marking the lowest settlement for front-month U.S. crude since Oct. 4, 2011.
DOLLAR GAINS, GOLD TUMBLES
The dollar index, a measure of the greenback's performance against a basket of currencies, rose 0.8 percent to 82.241.
Spot gold fell 2.5 percent to $1,566 an ounce, having earlier hit a low of $1,563.88, within 10 cents of turning negative for the year, compared with the 2011 close at $1,563.80 on Dec. 30. On New York's Comex, gold futures for August delivery dropped 3.1 percent, or $50.30, to $1,565.50 an ounce.
"When you see slowdown in China and in the United States and the debt crisis accelerate in Europe, it leads people to believe that we will have significant depreciation, especially when commodities and precious metals prices have been so tied into the monetary policy," said Jeffrey Sica, chief investment officer at SICA Wealth Management LLC, which oversees $1 billion in assets.
SPANISH BOND YIELDS DOWN
Spanish government bond yields fell sharply as Madrid tapped the markets with a sale of medium-term debt, although at an increased cost.
Spain sold 2.2 billion euros of two-, three- and five-year bonds, slightly more than the relatively small stated target amount, but it relied on its domestic banks to absorb the issuance.
Ten-year Spanish government bond yields fell 15 basis points to 6.62 percent, having risen to almost 7.30 percent last week.
U.S. bond yields were down as well. Benchmark 10-year Treasuries were last up 9/32 in price to yield 1.62 percent, down from 1.65 percent late on Wednesday.
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