NEW YORK (AFP) - US stocks opened 2016 on a dreary note Monday, falling sharply on worries about plunging Chinese equities and a brewing diplomatic crisis between Saudi Arabia and Iran.
Oil prices also fell in volatile trading.
At the closing bell, the Dow Jones Industrial Average shed 276.09 points (1.58 per cent) at 17,148.94.
The broad-based S&P 500 fell 31.28 (1.53 per cent) to 2,012.66, while the tech-rich Nasdaq Composite Index dropped 104.32 (2.08 per cent) to 4,903.09.
The losses in the US came on the heels of a bruising trading session in Asia and Europe after the Chinese stock market fell about seven per cent.
Analysts also pointed to concerns about the breakdown in relations between regional rivals Saudi Arabia and Iran after Riyadh severed diplomatic ties with Teheran following violent protests against the Saudi execution of a prominent Shiite cleric and activist.
"This situation has gotten the market off to a very ugly start," said Peter Cardillo, chief market economist at First Standard Financial.
A report from the Institute for Supply Management showed US manufacturing activity contracted in December for the second straight month.
Oil prices fell, with gains from an early rally on Middle East tensions vanishing as sliding global stock markets and worries about China extended crude's slump.
Brent jumped 4 per cent early on worries about Middle East tensions. But the benchmark erased its gains and settled a few cents lower as fears about the global economy outweighed concern about the dispute between Saudi Arabia and Iran, which looked unlikely to disrupt oil supplies immediately.
US crude's West Texas Intermediate (WTI) futures finished down almost 1 per cent, pressured by worries that record inventories could swell further at the Cushing, Oklahoma delivery hub. Last week's floods in the US Midwest prevented oil from getting to some refineries.
With Brent and WTI still trading some two-thirds below their mid-2014 highs, analysts said focus was back to the glut in global crude supplies.
"Given what is likely to be some high-pitched volatility within global equities this month, we look for a closer connection between oil and the stock market for a few weeks,"said Jim Ritterbusch, of Chicago-based oil markets advisory Ritterbusch & Associates.
Brent settled down 6 cents at US$37.22 a barrel. It hit a session high of US$38.99, its highest in nearly three weeks.
WTI finished down 28 cents at US$36.76. It had traded as high as US$38.39.
Global equity markets fell on renewed worries about economic growth after Chinese shares slid 7 percent on weak data. Wall Street's S&P 500 stock index fell about 2 per cent.
"The Saudi-Iran standoff is certainly one to worry over given its ramifications for oil supply," said Phil Flynn, analyst at the Price Futures Group brokerage in Chicago.
"But the equity markets selloff is more pressing and difficult to ignore because of the impact of China on the global economy and overall demand for oil."
The clash between Saudi Arabia and Iran comes as Teheran hopes to ramp up oil exports once sanctions come off against its nuclear program.
Traders said market intelligence firm Genscape reported a build of more than 480,000 barrels in Cushing crude supplies for the week to Jan 1, after flooding in the US Midwest caused temporary closure of a couple of pipelines.
Notwithstanding the Cushing build, analysts polled by Reuters forecast that crude stocks across the United States probably fell last week by 500,000 barrels.