More than £38 billion was wiped off the value of London's FTSE 100 index while in Europe and the US, markets were spooked about the state of the Chinese economy in 2016's first day of full trading.
Germany's share index the DAX posted its worst start to a new year on record, down more than 4%, with the FTSE putting in its second worst start to the year while France's CAC fell 2.5%.
According to CNBC, the Dow Jones industrial average closed around 275 points lower, down 1.58% in the worst start to the year since 2 January 2008. Prior to closing, the index fell 467 points, or over 2.5%, which would have been on pace for the largest first day decline since 1932.
"I think it's just some bottom fishing going on. Maybe some overreaction (earlier) to the news coming out of China. Oil still has a chance at a rebound," Robert Pavlik, chief market strategist at Boston Private Wealth told CNBC.
The Nasdaq composite closed just below the psychologically key 5,000 level at around 4,900. It was down around 104 points lower. Meanwhile, the S&P 500 struggled to hold the psychologically key 2,000 level but closed slightly above. According to CNBC, the index briefly dipped below 2,000 level in day trade for the first time since the middle of December.
"We took out 2,000 on the S&P 500 and 17,000 on the Dow. That (may be) creating some levels for some selling going down," Peter Coleman, head trader at Convergex, told CNBC of the mid-morning decline in the stocks.
In China, the Shanghai Composite Index closed down nearly 7%. The drop in Chinese stocks followed a business survey that suggested manufacturing activity in China contracted for the 10th successive month in December and at a faster pace than the previous month.
Chinese regulators had to activate a suspension in trading as a "circuit breaker" safety measure. The new rule, which was introduced on the first day of trading in the year, states that swings of up to 5% trigger a 15-minute trading suspension and a rise or fall of 7% halts trading for the rest of the day.
Alastair McCaig, market analyst at online trading company IG told the Guardian: "Anyone hitting the trading floor expecting a calm and quiet start to 2016 was given a rude surprise as Asian chaos affected European markets.
"This swift return to the 2015 template of worrying about China looks to have been the trigger for the sell-off in Chinese equities," he added.