The FTSE 100 closed more than three per cent lower, at 6,058 points, after another day of weak economic data from both China and Europe.
Other European markets followed suit, with both the Cac and the Dax finishing 2.4 per cent lower. Meanwhile, US stocks also dropped, with the S&P 500 and the Dow falling 2.2 per cent in lunchtime trading.
The falls followed a sharp contraction in China manufacturing data for August, which exacerbated fears a slowdown in the world's second largest economy could spill over into other markets.
Read more: Black Monday: £74bn knocked off FTSE 100 as markets respond to deteriorating China outlook
The official purchasing manager's index (PMI) dropped to 49.7 last month – down from 50 in July. Separately, the Caixin/Markit PMI, which measures manufacturing activity among private companies, put the figure at an even lower level of 47.3, its weakest since 2009. Any figure below 50 denotes a contraction.
Asian stock markets reacted badly to the news, with the Shanghai Composite closing 1.23 per cent lower, while the Shenzhen Composite fell 4.61 per cent.
At the end of last week, it seemed US and European markets were pairing losses after Monday's shock 8.5 per cent fall in Chinese stocks. An interest rate cut by the country's central bank, combined with an indication from the Fed that US rates may not be raised in September, gave investors hope work was being done to stabilise the key economies.
Naeem Aslam, chief market analyst at Ava Trade, commented:
The manufacturing PMI data is the measure of large state owned firm and the reading not only fell short of expectations, but it also dipped into a negative territory and this makes the headline which traders certainly do not like at all.The slump is also seen in the small and medium size business and this paints a very disappointing picture which reflects that both big and small firms are craving for growth. If both small and large size firms are struggling, then where are we going to see any sign of growth?
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