U.S. stocks fall sharply on bleak Chinese manufacturing report

Stocks plunged again Tuesday, continuing a rocky ride for Wall Street, after gloomy economic data out of China rekindled fears that the world's second-largest economy is slowing more than previously anticipated.

Tuesday's sell-off adds to what has been a difficult few weeks for U.S. and international markets. U.S. stocks are coming off their worst month in more than three years. The drop also dashed hopes that, after some relatively calm trading on Friday and Monday, the stock market's wild swings were coming to an end.

"Monday's relatively peaceful markets are a distant memory as Chinese data and shares sparked another severe ... reaction from the developed world," said John Briggs, head of fixed income strategy at RBS.

As of 2:45 p.m. Eastern time, the Dow Jones industrial average was down 382 points, or 2.3 percent, to 16,143. The Standard & Poor's 500 index declined 46 points, or 2.4 percent, to 1,925 and the Nasdaq composite dropped 106 points, or 2.2 percent, to 4,669.

As it's been for the last several weeks, the selling and problems started in Asia.

An official gauge of Chinese manufacturing fell to a three-year low last month, another sign of slowing growth in that country. The manufacturing index, which surveys purchasing managers at factories, dropped to 49.7 in August from 50.0 in July. A reading below 50 indicates a contraction.

China's stocks sank on the news, with Shanghai Composite Index closing down 1.2 percent. The index has plunged 38 percent since hitting a peak in June.

The Chinese economy has been a focus for investors all summer, and the concerns have intensified in the last three weeks. China devalued its currency, the renminbi, in mid-August. Investors interpreted the move as a sign that China's economy was not doing as well as previously reported.

Investors moved into traditional havens like bonds and gold Tuesday. Bond prices rose, pushing the yield on the benchmark 10-year Treasury note down to 2.18 percent from 2.22 percent on Monday. Gold rose $7.30, or 0.6 percent, to settle at $1,139.80 an ounce.

Faced with the possibility of slowing demand in China, commodity markets once again fell.

Benchmark U.S. crude slumped $3.79, or 7.7 percent, to close at $45.41 a barrel on the New York Mercantile Exchange. Industrial metals fell.

Energy stocks were once again among the biggest decliners. Exxon Mobil fell nearly 4 percent and Chevron fell 2.5 percent. Exxon is down 22 percent this year, Chevron 30 percent.

Fed watch

Along with worries about China, speculation about whether the Federal Reserve will raise interest rates as soon as this month continues to weigh on markets. Traders say a lot hinges on the August jobs report, released this Friday. Economists are forecasting that U.S. employers created 220,000 jobs in August, and that the unemployment rate fell to 5.2 percent.

The Federal Reserve meets Sept. 16 and 17. Some economists are predicting that policymakers will be confident enough in the U.S. economic recovery to raise interest rates for the first time in almost a decade. While Fed officials are mostly focused on the U.S. economy, they cannot ignore the problems in China and the impact on the global economy.

"China's problems are totally a concern for the Fed," said Tom di Galoma, head of rates trading at ED&F Man Capital. "With inflation remaining low here, I just don't a reason why they would raise rates."