Equities on both sides of the Atlantic dropped after a report showed that China's manufacturing is headed for a contraction this month, fuelling concern about the sustainability of the global economic recovery.

A preliminary survey from HSBC and Markit Economics showed a reading of 49.6 for China's Purchasing Managers' Index, down from a final reading of 50.5 in December and the lowest in six months.

"The marginal contraction of January's headline HSBC Flash China Manufacturing PMI was mainly dragged by cooling domestic demand conditions," Hongbin Qu, chief economist, China & co-head of Asian economic research at HSBC, said in a statement. "This implies softening growth momentum for manufacturing sectors, which has already weighed on employment growth. As inflation is not a concern, the policy focus should tilt towards supporting growth to avoid repeating growth deceleration seen in [the first half of] 2013."

In afternoon trading in New York, the Dow Jones Industrial Average shed 1.05 per cent, the Standard & Poor's 500 Index sank 1.09 per cent, while the Nasdaq Composite Index dropped 0.97 per cent. Slides in shares of American Express, last down 2.3 per cent, and those of JP Morgan Chase, last 2.2 per cent weaker, paced losses in the Dow.

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"The China data continues to be persistently weak," Jim Russell, senior equity strategist for US Bank Wealth Management in Cincinnati, told Reuters.

In Europe, the Stoxx 600 Index slid 1 per cent, as did France's CAC 40. The UK's FTSE 100 gave up 0.8 per cent, while Germany's DAX dropped 0.9 per cent.

"We are scared about a slowdown in China," Paolo Vicentini, who is responsible for total return strategies at Edmond de Rothschild in Milan, told Bloomberg News. "If the economy does not keep growing at the same pace, companies in key European countries like Germany which depend on Chinese demand will suffer."

The latest US economic data were a mixed bag. The preliminary US PMI fell to 53.7 this month, down from 55.0 in December, according to Markit.

"The flash PMI indicates that the manufacturing sector continued to grow at the start of 2014, and that the underlying trend most likely remained reassuringly robust," Chris Williamson, chief economist at Markit, said in a statement.

Separately, jobless claims rose by 1,000 to 326,000 last week, less than the 330,000 economists had expected, while sales of previously owned homes increased 1 per cent in December to a 4.87 million annual pace. Sales for 2013 were the highest since 2006.

"We lost some momentum toward the end of 2013 from disappointing job growth and limited inventory, but we ended with a year that was close to normal given the size of our population," Lawrence Yun, NAR chief economist, said in a statement.

In the euro zone, both consumer confidence and manufacturing output rose more than expected in January, according to separate reports released today.

The latest US earnings offered both disappointment and reasons for optimism. Netflix did the latter, boosting its shares by 15.9 per cent, as the company's outlook surpassed expectations.

Shares of American Eagle Outfitters tumbled, however, last 9.1 per cent weaker, after the company announced that its CEO is leaving.