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Trade-sensitive tech companies suffered the largest percentage decline.
Wall Street sank on Monday after China defied Washington by announcing retaliatory tariffs, the latest salvo in the two countries' increasingly belligerent trade war, sending investors fleeing equities for less risky assets.
All three major U.S. indexes lost ground in a widespread sell-off, with the tech-heavy Nasdaq posting its biggest one-day percentage loss this year. The S&P 500 and the Dow both had their largest percentage drop since Jan 3.
China said it would impose higher tariffs on US$60 billion in U.S. goods, following President Donald Trump's warnings not to retaliate against additional tariffs on Chinese imports announced by the White House on Friday. The move stoked fears of a global economic downturn.
Previously, the United States activated a new 25 percent duty on more than 5,700 categories of products from China, even as top Chinese and U.S. negotiators resumed trade talks in Washington.
"The market's realizing that this was an absolute breakdown of (trade) talks and everything is gone backwards," said Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.
"It could be very bad," O'Rourke added. "There's a lot of uncertainty. This should lead to further slowing in the economy."
Investors responded by fleeing equities for safe-haven assets.
U.S. Treasury yields fell to six-week lows, with 10-year yields falling below those of 3-month bills, an inversion seen by many as a potential harbinger of recession. Gold prices rose to a near three-month high.
The CBOE Volatility index, a gauge of investor anxiety, posted its biggest daily point gain so far this year.
The Dow Jones Industrial Average fell 617.38 points, or 2.38%, to 25,324.99, the S&P 500 lost 69.53 points, or 2.41%, to 2,811.87 and the Nasdaq Composite dropped 269.92 points, or 3.41%, to 7,647.02.
Of the 11 major sectors of the S&P 500, only utilities ended the session in the black.