US and European markets fell sharply on Monday as they followed a plunge across Asia, where China suspended trading after weak manufacturing data prompted a miserable start to 2016 for investors.

London's key FTSE 100 index fell 2.4 per cent, losing 148.9 points, while Germany's DAX plunged nearly 4.3 per cent.

Shares in major mining firms with strong interests in China were among the big losers in London, while oil giants BP and Royal Dutch Shell also fell amid rising tension between Iran and Saudi Arabia.

In New York, the Dow Jones Industrial Average index lost nearly 2.5 per cent in early trading and closed with a 1.6-per-cent decrease, losing 276 points.

The Standard & Poor's 500 fell 1.5 per cent and the NYSE Composite index also plunged 1.4 per cent, as the disappointing Chinese data sent ripples across global stock markets.

On the first day of business of the year, Chinese regulators halted trading on the main bourses, the Shanghai and Shenzhen stock exchanges, after a benchmark index fell more than 7 per cent.

The fall in the CSI 300 Index triggered an automatic "circuit breaker" mechanism - only introduced on Monday - that halted trading for the day.

The CSI 300 comprises the 300 largest firms listed on the mainland.

A 5-per-cent slide earlier in the day caused a 15-minute pause in trading, but the index continued to slide after the break until it hit the 7-per-cent mark.

China's other main indexes also showed dramatic falls of 6 to 8 per cent.

The rout followed disappointing results released earlier from China's manufacturing sector.

The purchasing managers index (PMI) showed a reading of 48.2, down from 48.6 in November, and down for the 10th straight month.

A figure below 50 indicates a negative outlook as measured by managers' purchasing intentions.

"This dramatic slump on China's stock exchange is an indicator of the growing uncertainty over China's economic health," said Sebastian Heilmann, director of the Mercator Institute of China Studies in Berlin.

The negative outlook affected Asia's second-biggest economy, Japan, where shares plunged 3 per cent, also due to a stronger yen. 

The benchmark Nikkei 225 Stock Average lost 582.73 points, or 3.06 per cent, to end at 18,450.98 while the broader Topix index was down 37.63 points, or 2.43 per cent, at 1,509.67.

China is Japan's biggest trading partner.

Key shares in Hong Kong also plunged Monday. The Hang Seng was down over 2.5 per cent, while other indexes fell beyond the 3-per-cent mark.

South Korean and Taiwanese stocks suffered similar falls.

The circuit-breaker rule was proposed after volatility on the Shanghai stock exchange sent jitters through global markets in the second half of last year.

Chinese stocks slid more than 30 per cent from a peak in June over a three-week period last year, prompting a raft of government measures over the following months, including the suspension of new listings, the establishment of rescue funds, and allowing pension funds to invest more in stocks.

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