NEW YORK (AFP) - United States stocks on Thursday fell sharply in early trade after a report showed that Chinese manufacturing contracted for the first time in six months in January.

Abut 35 minutes into trade, the Dow Jones Industrial Average lost 144.41 (0.88 per cent) at 16,228.93.

The broad-based S&P 500 sank 13.74 (0.74 per cent) to 1,831.12, while the tech-rich Nasdaq Composite Index declined 32.01 (0.75 per cent) to 4,210.99.

HSBC's China manufacturing sector purchasing managers index fell to 49.6, below the line between growth and contraction, raising concerns that the world's second largest economy is still trying to find its footing.

IBM dipped 0.2 per cent after announcing the US$2.3 billion (S$2.9 billion) sale of its low-end server business to Chinese computer giant Lenovo. IBM said the divestiture will allow it to focus on growth areas such as cloud computing.

Netflix shot up 16.9 per cent after quarterly earnings rose to US$48 million compared with US$8 million a year ago. The online video-streaming company also reported a big jump in subscribers.

Online marketplace eBay rose 0.2 per cent after announcing that activist investor Carl Icahn had taken a stake in the company and was advocating a spinoff of its PayPal payments unit. EBay said it will fight Mr Icahn's proposal.

Dow component McDonald's rose 0.8 per cent after earnings of US$1.40 per share bested expectations by a penny. Chief executive Don Thompson said the company was gearing up for the new year after a "challenging" 2013.

Freight rail company Union Pacific gained 3.4 per cent after earnings of $2.55 per share beat expectations by six cents. The company sees a "slowly strengthening" economy in 2014.

Bond prices rose. The yield on the 10-year US Treasury fell to 2.81 per cent from 2.86 per cent Wednesday, while the 30-year declined to 3.72 per cent from .3.76 per cent. Bond prices and yields move inversely.