A sharp slump in Chinese markets piled further pressure on stocks Monday, after patchy economic data and corporate earnings spurred declines last week.
China stocks suffered their sharpest drop in eight years amid concerns the government is pulling back on measures to prop up to the market. The Shanghai Composite Index ended down 8.5%, its second-straight day of losses and worst daily percentage fall since Feb. 27, 2007.
Markets slipped in the U.S. The Dow Jones Industrial Average fell 128 points, or 0.7%, to 17441 in afternoon trading. The S&P 500 index shed 0.5% after Friday's 1.1% fall, and the Nasdaq Composite Index dropped 0.8%.
The slide prompted heavy selling in European stocks, with the Stoxx Europe 600 closing 2.2% lower, its biggest one-day percent decline in a month. Germany's DAX and France's CAC 40 both shed 2.6%, while the U.K.'s FTSE 100 lost 1.1%.
Commodities, including crude oil and copper, tumbled.
The recent slide in Chinese shares has shaken investors in recent weeks and raised questions about the underlying economic health and pace of growth of the once-booming economy. Monday's decline marks the fifth- straight day of losses for both the S&P and the Dow. The S&P 500 is now up just 0.4% for the year. The Dow, which had its steepest point decline last week since December, has lost 2.2% so far this year.
"The problems we are now seeing in China are the inevitable result of an economy that had grown too fast and at any cost," said Michael Farr, president of financial adviser Farr, Miller & Washington. He added that China's massive economic footprint means "China is a much bigger risk right now than Greece ever was."
Meanwhile, Treasury prices rose as investors sought haven assets, pushing the yield on the 10-year note down to 2.232% from 2.271% on Friday. Gold futures rose 1% to $ 1096.50 an ounce.
"When a major index goes down 8% in one day, it's going to impact investor sentiment for sure," said Michael Antonelli, equity sales trader at Robert W. Baird. "The unknowns are really large there in terms of what the government can do to intervene in the market."
On Monday morning, investors received readings on U.S. durable goods orders in June, which rose 3.4%, compared with analysts' estimates of a 2.7% rise. The Dallas Fed said its reading on manufacturing activity stood at -4.6 in July, denoting contracting activity.
The euro rose against the dollar Monday. Still, the euro has dropped 9.2% against the dollar this year, through Friday.
Few major U.S. earnings reports were due Monday. The number of companies reporting earnings picks up later this week with results due from Ford Motor Co., Facebook Inc. and Procter & Gamble Co.
"Some big names…have stated specifically that the strength of the dollar is crimping corporate profits," said Mr. Brady. "With stretched valuations and an adjustment taking place given the stronger dollar, it's really hard to see equities moving significantly higher from here."
In corporate news, Teva Pharmaceutical Industries Ltd. said it would buy Allergan PLC's generics unit for $ 40.5 billion in cash and stock. Separately, Teva said it would drop its bid for Mylan NV. Teva shares rose 8.9%, and those of Allergan added 7.2%.
A sharp rally two weeks ago after Greece reached a deal with its creditors to negotiate a new bailout has foundered amid lackluster earnings in Europe and the U.S., said François Savary, who oversees $ 11.4 billion as chief strategist at Swiss bank Reyl.
"There are a lot of bets that the economic recovery in Europe is here and that is going to boost earnings," he said. "So far it is OK, but it isn't stellar."
Earnings were again in focus in Europe on Monday. Swiss bank UBS AG declined despite second-quarter profit that exceeded forecasts. Airline Ryanair Holdings PLC also fell after it didn't raise its full-year profit guidance.
Consumer products giant Reckitt Benckiser Group PLC climbed after reporting a rise in earnings.
Given relatively high valuations, equity markets "need better earnings" to drive further gains, said Ian Williams, economist and strategist at Peel Hunt.
Write to Dan Strumpf at daniel.strumpf@wsj.com and Tommy Stubbington at tommy.stubbington@wsj.com
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