The Nasdaq composite fell 1.2 percent to 5,007.41.
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The plunge began on the Shanghai index, which dived 6.9 per cent to 3,296.66 before the market was closed early to avert steeper falls.
The Shanghai and Shenzhen exchanges ended the trading session early after the CSI 300 plunged 7 percent, triggering a circuit breaker.
Gu Yongtao, strategist at Cinda Securities, said: “The slump apparently triggered intensified selling, while the triggering of the circuit breaker seems to have heightened panic, as liquidity was suddenly gone and this is something no one has experienced before”. The DAX index in Germany, whose export-led economy is sensitive to China’s fortunes, tumbled 4.2 percent to 10,288.22.
Iranian protesters burned and attacked the Saudi embassy in Tehran, and Saudi Arabia cut off diplomatic relations with Iran.
“Right now, the focal point is China, the global economic condition, and the fact that we’re coming off a disappointing year on many levels, a frustrating year on many levels”, he said.
OIL RISE: Benchmark U.S. crude added $1, or 2.8 percent, to $38.04 per barrel in New York Mercantile Exchange. Tokyo’s Nikkei 225 slid 3%, Hong Kong’s Hang Seng was down 2.7%, and Seoul’s Kospi Composite shed 2.2%. The CAC 40 in Paris was off 2.7% and the broad Stoxx Europe 600 was 2.7% lower. Stocks in Australia, Taiwan and Southeast Asia were also lower.
Bond prices rose. The yield on the 10-year Treasury note fell to 2.23 percent.
AP researcher Fu Ting in Shanghai contributed to this report.
Analysts said selling in Chinese markets was also driven by other factors, including the scheduled lifting of bans on IPOs and sales by larger investors.
In recent weeks the market has been dragged lower by falls in Brent Crude, at around 37.14 United States dollars, as major suppliers such as Saudi Arabia and Russian Federation have continued pumping crude in a bid to defend their global market shares.
While trading activity was relatively light on the last day of the year, stocks moved mostly lower over the course of the trading day last Thursday.
Anglo American was down 8 per cent, Glencore fell 7 per cent, while Antofagasta slipped 5 per cecnt. Tensions between the Middle East powers have intensified since the Saudis announced the execution Saturday of Sheik Nimr al-Nimr, a beloved cleric among Shiite Muslims known as a voice for free Saudi elections during the Arab Spring protests.
Polish stocks led the way, losing 2.3 percent as mixed factory activity data added to nerves about some of the changes its new government is making. These tools were first discussed a year ago following the significant correction in the country over the summer.
Shares in many of China’s leading entertainment companies were hit hard by the carnage.
“The massive sell-off followed the release of data showing parts of the Chinese economy are continuing to contract”.
“While today’s unofficial manufacturing PMI hints at some further weakness in the manufacturing sector, other indicators suggest that the economy as a whole held up reasonably well last month”, analysts at Capital Economics said.
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That forced both markets to close 90 minutes earlier than usual on the first day the circuit-breakers came into effect.
