Equities on both side of the Atlantic sank amid concern about US interest rate policy, a surprise profit warning from Adidas and a decision by Argentina to default on its debt.
Shares of Germany's Adidas tanked 15.5 percent after the company unexpectedly downgraded its full-year earnings outlook citing recent developments in Russia and lower demand for its golf products. Rival Nike's shares also dropped for the second-largest percent decline in the Dow Jones Industrial Average.
"The profit warning could almost have been predicted but the extent of it is catastrophic," Ingo Speich, a fund manager at Union Investment which is the 10th-biggest investor in Adidas with a 1.2 percent stake, told Reuters. "Unfavourable conditions are no excuse. Nike is stealing Adidas' thunder in important markets."
Also weighing on markets was Argentina's debt default, which reignited concern that it might not take much for euro-zone countries to slip back into a credit crisis.
"The default ties back to the spectre of what's going on in Portugal, and it all reminds people that the euro-zone crisis from years ago may not be fully resolved," Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio, told Reuters.
In Europe, the Stoxx 600 Index ended the session with a 1.3 percent drop from the previous close. The UK's FTSE 100 Index fell 0.6 percent, France's CAC 40 retreated 1.5 percent, while Germany's DAX shed 1.9 percent.
In late afternoon trading in New York, the Dow Jones Industrial Average slumped 1.62 percent, the Standard & Poor's 500 index sank 1.87 percent, while the Nasdaq Composite Index dropped 2.04 percent. At one point, the Dow had shed almost 300 points.
Slides in shares of Exxon Mobil and Nike, down 2.9 percent and 2.7 percent respectively, led the decline in the Dow.
Shares of Exxon slid after the company posted a drop in oil and natural gas production.
Shares of Whole Foods Market dropped 2.8 percent after the company cut its sales outlook, while shares of Kraft Foods tumbled 6.2 percent after the company posted a drop in quarterly profit.
Meanwhile, initial claims for unemployment benefits increased by 23,000 to a seasonally adjusted 302,000 in the week ended July 26, from a revised 279,000 the prior week, according to the Labor Department. The data were better than anticipated.
"Employment growth remains healthy," David Sloan, a senior economist at 4Cast in New York, told Bloomberg News. The reading is "consistent with a strong labour market."
A government report on Friday is expected to show that US employers hired 231,000 workers in July, after an increase of 288,000 in June.
And in the background was this week's message from the US central bank that the world's largest economy continues to recover, which is being interpreted by at least some investors as a signal rate hikes could come sooner than expected.
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