Stocks on both sides of the Atlantic, US Treasuries and gold fell, though pared some of their earlier losses, amid concern about the reduction of central bank stimulus in the world's largest economy and worry about the prospects for China, the world's second-largest economy.
Equities in China slumped, sending the country's benchmark CSI 300 Index down 6.3 per cent from the previous close, amid signs the nation's banks are increasingly wary of lending money to customers.
In the US investors are still trying to assess how soon the Federal Reserve might start paring back its US$85 billion a month bond-buying program, following Chairman Ben Bernanke's comments on June 19 that it might begin this year and end the program in mid-2014.
"I agree fully with the chairman that we should dial back on the stimulus" should "we achieve what the 19 of us forecast," Federal Reserve Bank of Dallas President Richard Fisher said in a speech in London on Monday, according to Bloomberg News. He also said investors were overreacting to the Fed's plans.
In late afternoon trading in New York, the Dow Jones Industrial Average fell 0.39 per cent, the Standard & Poor's 500 Index slid 0.85 per cent and the Nasdaq Composite Index dropped 0.82 per cent. Gains in shares of Microsoft, up 2.4 per cent, and Johnson & Johnson, up 1.9 per cent, helped limit losses in the Dow.
Earlier in the session, the S&P 500 had dropped as much as 2 per cent.
US Treasuries also dropped, pushing yields on the 10-year bond to the highest level in almost two years earlier in the session before rallying in late trading in New York.
"The exit door is not that big and everyone's going at the same time," Justin Lederer, strategist at Cantor Fitzgerald in New York, told Reuters. "This is not just about a Treasury backup, this is a global, everyone-getting-out-of-everything."
In Europe, the benchmark Stoxx 600 Index fell 1.7 per cent from the previous close. Germany's DAX lost 1.2 per cent, the UK's FTSE 100 declined 1.4 per cent, and France's CAC 40 closed 1.7 per cent lower.
"Investors have been shaken by the concept of rising interest rates and a reduction in stimulus from the Federal Reserve, coupled with the uncertainty regarding effectively how robust the Chinese central banking system is," Ethan Anderson, senior portfolio manager for Rehmann Financial in Grand Rapids, Michigan, told Bloomberg News.
On a positive note, Germany's business confidence rose in June, as the Ifo business-climate index increased to 105.9, up from 105.7 in May.
"Although assessments of the current business situation are slightly less positive, firms are increasingly optimistic with regard to their future business outlook," Kai Carstensen, head of business analysis and surveys at Ifo, said in a statement. "The German economy holds its course."