* China factory activity shrinks at fastest pace in 3 years
* Dollar sags, S&P 500 down
* Crude oil futures drop
(Updates with U.S. market closing levels)
By Caroline Valetkevitch
NEW YORK, Sept 1 (Reuters) - World stock indexes and oil
prices slumped on Tuesday as weak Chinese data fueled worries
about a slowdown in its economy, the world's second biggest, and
sparked more market turmoil.
The fall in oil prices ended a three-day rally that had
driven crude up more than 20 percent. Brent fell below $50 a
barrel on concerns about global demand for petroleum.
U.S. stocks fell nearly 3 percent, with all three major U.S.
equity indexes firmly in negative territory for the
year-to-date. The benchmark S&P 500 is down 7 percent since Dec.
31.
The CBOE Volatility index .VIX, known as Wall Street's "fear
gauge", was up 10.45 percent at 31.40, above its long-term
average of 20. The index had spiked to 53.29 on Aug. 24.
The moves followed a stormy week that left investors
concerned about further market losses due to slowing growth in
China and the effect on the global economy. The S&P 500 on
Monday posted its worst monthly decline since 2012.
The recent signs of weakness in big economies has raised
doubts about earnings growth and fueled worries about whether
central bank support could make a difference after years of
loose policy around the globe.
Comments by Federal Reserve Vice Chairman Stanley Fischer
over the weekend appeared to keep alive the chances of a U.S.
interest rate increase in September.
"It's general risk aversion manifesting itself after a
really bad August," said Mohannad Aama, managing director at
Beam Capital Management LLC in New York. "The continued
uncertainty about China is definitely adding to worries."
Sparking Tuesday's selloff, surveys showed China's
manufacturing sector shrank at its fastest pace in three years
while its services sector also cooled.
Data showing U.S. factory activity hit a more than two-year
low in August added to investor jitters.
The Dow Jones industrial average .DJI fell 469.68 points,
or 2.84 percent, to 16,058.35, the S&P 500 .SPX lost 58.33
points, or 2.96 percent, to 1,913.85, and the Nasdaq Composite
.IXIC dropped 140.40 points, or 2.94 percent, to 4,636.11.
MSCI's all-country stock index .MIWD00000PUS fell 2.7
percent and is now down 7.4 percent for the year-to-date. The
pan-European FTSEurofirst 300 stocks index .FTEU3 closed down
2.8 percent.
In the oil market, Brent crude LCOc1 dropped 8.5 percent
to $49.56 a barrel. U.S. crude CLc1 fell 7.7 percent to
$45.41.
While shares and commodities remained the focus, the mood
was similarly wary in the currency and bond markets.
U.S. Treasuries prices rose as the Chinese and U.S. data
fueled safe-haven bids. Possible selling of long-dated
Treasuries by foreign central banks capped those bonds' gains.
U.S. 10-year Treasuries US10YT=RR were last up 8/32 in
price to yield 2.17 percent, from a yield of 2.20 percent late
on Monday.
The dollar sagged against the safe-haven yen and
low-yielding euro as investors unwound bets against the two
currencies, which are widely used to fund positions in riskier
assets.
The dollar was last off 1.20 percent against the yen, at
119.80 yen JPY= , while the euro rose 0.70 percent to $1.1297
EUR= .
FRAGILE CHINA
The head of the International Monetary Fund, Christine
Lagarde, summed up the global outlook in a speech in Indonesia,
where she said global economic growth was now likely to be
weaker than had been expected just a few months ago.
She cited a slower recovery in major advanced economies and
a further slowdown in emerging nations and highlighted the need
to "be vigilant for spillovers" from China's stutters.
In the metals markets, benchmark copper CMCU3 on the
London Metal Exchange ended at $5,067 a tonne, down 1.3 percent
from Friday's close, as markets reopened after a long holiday
weekend.
Gold rose 1 percent as the dollar and global equities
dropped. Spot gold XAU= rose to a session high of $1,147.16 an
ounce.