Equities and commodities dropped overnight after China unexpectedly devalued its currency, intensifying concern about the slowing pace of growth in the nation's economy.
In a surprise move, China's central bank lowered its daily reference rate by 1.9 percent, prompting the yuan's biggest drop against the US dollar in more than two decades.
"What is good for growth in China is unfortunately bad for everybody else," Bill McQuaker, co-head of the multi-asset team at Henderson Global Investors, told Reuters.
Shares of car makers on both sides of the Atlantic including Ford, General Motors, BMW, and Daimler were among those hit by worries that their sales in China might suffer.
In late trading in New York, the Dow Jones Industrial Average dropped 1.3 percent, the Standard & Poor's 500 Index fell 1.2 percent, while the Nasdaq Composite Index slid 1.7 percent.
Slides in shares of Apple and those of Caterpillar, last down 5 percent and 2.8 percent respectively, led the Dow lower.
"The driving forces today continue to be macro-oriented with China the most important," Tom Wright, the New York-based director of equities at JMP Securities, told Bloomberg. "We spend a lot of time obsessing over Greece or Puerto Rico, but China is a much bigger economy and a much bigger problem to the global economy and devaluing the currency is shaking people up."
In Europe, the Stoxx 600 Index ended the session with a 1.6 percent drop from the previous close. The UK's FTSE 100 Index fell 1.1 percent, France's CAC 40 Index declined 1.9 percent, while Germany's DAX Index sank 2.7 percent.
"It's logical that Europe's main exporters, like German automakers and luxury, move down significantly because it will be more difficult for these companies to sell in China," Francois Savary, Geneva-based chief investment officer at Reyl & Cie, told Bloomberg. "Equity investors now need to factor in the currency move into their models."
China's efforts at economic stimulus through currency devaluation also called into question the timing of a US Federal Reserve interest rate hike, so far widely predicted for September.
"Those two are in opposition to each other," Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago, told Reuters. "It's hard for the US to be the island in the storm around the world and that's why we are seeing markets jump around."
Oil dropped more than 4 percent after a monthly report from the Organisation of Petroleum Exporting Countries showed it raised output by 100,700 barrels a day to 31.5 million in July, the most in three years.
Bucking the trend, shares of Google jumped, last up 4.2 percent, after the company announced a reorganisation with the creation of a new holding company called Alphabet.
"Alphabet is mostly a collection of companies. The largest of which, of course, is Google," Larry Page, CEO of Alphabet, said in a statement. "This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main internet products contained in Alphabet instead."