LONDON (AFP) - Stock markets tumbled around the world on Thursday, and gold slumped close to a three-year low after the United States Federal Reserve signalled it may begin winding down its massive stimulus programme later this year.

Indications the Fed is looking to end its bond-buying policy triggered a steep selloff in Asia, with Europe and Wall Street following in turn. In mid-trade, London's benchmark FTSE 100 index plummeted 3 per cent to stand at 6,157.76 points, Frankfurt's Dax 30 dived 3.14 per cent to 7,939.66 points and in Paris the CAC 40 slumped 3.01 per cent to 3,725.56 points.

"In a classic case of perverse logic, European markets were caught up in a vortex of selling today", said Mr Michael Hewson, senior market analyst at CMC Markets UK.

"The sell-off was given added momentum by rising concerns of a credit crunch in China, as well as a simply horrible manufacturing PMI print, as concerns about the trajectory of Chinese growth continued to build up," he said.

Wall Street also fell sharply after booking stiff losses the previous day. In late morning trade, the Dow Jones Industrial Average shed 1.56 per cent to 14,877.13 points, while the broad-based S&P 500 fell 1.56 per cent to 1,603.58 points, and the tech-rich Nasdaq Composite Index tumbled 1.4 per cent to 3,395.14 points.

On forex markets, the European single currency fell steeply to US$1.3180, down from US$1.3297 in New York late on Wednesday.

On the London Bullion Market, the price of gold tumbled as low as US$1,286.20 an ounce - the precious metal striking a point last seen in September 2010. It later recovered somewhat to US$1,292.50.

Euro zone bonds fell across the board, including safe-haven German government debt, pushing up interest rates. Yields on 10-year German bond, or Bunds, climbed to 1.67 per cent, the highest level since February.

The Fed said on Wednesday it would keep in place its US$85 billion-a-month bond-buying programme, which is known as "quantitative easing" (QE), as unemployment remains high and growth in the world's top economy was being held back by government spending cuts.

However, in a news conference, Fed chairman Ben Bernanke said the US central bank's policy committee "currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year" if the economic outlook continues to improve.

"Ben Bernanke has put the cat well and truly among the pigeons with his statement that asset purchases would begin slowing by the end of this year," said analyst Yusuf Heusen at trading firm IG. "It does feel as if the Fed chairman has pulled the rug from underneath the stock market rally, and he certainly seems to have dealt a killer blow to gold."

A rising greenback makes dollar-priced gold more expensive for buyers using rival currencies, weighing on demand.

The signalled pullback in stimulus was brought on by an upgrade in the Fed's assessment of the economic recovery, with unemployment now forecast to fall to 6.5 per cent by the end of next year .

Global markets have been sent into turmoil in recent weeks as dealers priced in a possible end to QE. The programme had helped fuel a rally in equities since the Fed said in September it would provide vast sums of cash until the world's biggest economy showed signs it was back up to strength.

Earlier, Tokyo shed 1.74 per cent, Hong Kong slumped 2.9 per cent and Shanghai fell 2.77 per cent.

Adding to selling pressure was preliminary data on Chinese manufacturing from HSBC, which showed activity contracted again in June and was at a nine-month low point.

The British banking giant HSBC said its preliminary purchasing managers' index for China came in at 48.3, worse than May's final reading of 49.2, and its lowest since September.

A reading below 50 indicates contraction, while anything above signals expansion.