Wall Street erased earlier gains after a report showing US manufacturing grew at its slowest pace in two years last month underpinned recent data indicating the world's largest economy might be teetering on the brink of recession.

In afternoon trading, the Dow Jones Industrial Average fell 0.71 per cent, the Standard & Poor's 500 Index dropped 0.99 per cent and the Nasdaq shed 1.25 per cent. Earlier in the session, the S&P 500 had risen as much as 1.2 per cent.

The Institute for Supply Management said on Monday its index of national factory activity fell to 50.9, from 55.3 in June and well short of economists' expectations of a 54.9 reading.

"One has to carefully consider this economic data point as an indication of a continuing slowdown which will perhaps bleed into earnings," Chad Morganlander, portfolio manager at Stifel, Nicolaus & Co in Florham Park, New Jersey told Reuters. "It indicates a lack of vitality that would improve employment."

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The market had opened positive amid optimism about a last-minute deal to raise the US debt ceiling, and avoid a default.

The 11th-hour White House-backed deal, which lawmakers will vote on today, would allow President Barack Obama to raise the debt ceiling in three steps. Congress would get a chance to register its disapproval on two of these, but would not be able to block them unless it musters a two-thirds vote in both the House and the Senate, according to Reuters.

The deal includes spending cuts of about US$2.4 trillion over 10 years, which Congress would approve in two steps; an initial US$917 billion when the deal passes Congress and another US$1.5 trillion by the end of the year.

Health care stocks suffered today, with the S&P health care index down 2.5 per cent, as the industry might bear the brunt of budget cutbacks.

"Medicare is the one that's on the chopping block - the one that's getting all the threat of a cut if they can't agree," Marc Pado, US market strategist at Cantor Fitzgerald & Co in San Francisco, told Reuters.

There's a lot at stake. Euro group chairman Jean-Claude Juncker said on Monday it would be surprising if the rest of the world, and the euro zone, in particular, avoided repercussions were the US to lose its AAA credit rating. He made the comments in an interview with France's Le Figaro newspaper.

Meanwhile, officials of the European Union and International Monetary Fund began their first review of Portugal's international bailout. The verdict on Lisbon's efforts to meet the terms of the 78-billion euro rescue package agreed in May will help determine whether the lenders release a second tranche of funds or set additional conditions for doing so.

European companies are struggling to meet earnings expectations. About 53 per cent of companies in the Stoxx Europe 600 Index that have reported earnings since July 11 missed analysts' projections, according to Bloomberg News. That's the most in data compiled by Bloomberg since 2006.

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Even though HSBC Holdings bucked the trend by posting an unexpected increase in first-half profit, Europe's biggest bank said it planned to cut 30,000 jobs as it retreated from countries where it was struggling to compete.

The Stoxx Europe 600 Index ended the day with a 1.2 per cent drop, closing at the lowest level in eight months.