Near 2000 GMT, the Dow Jones Industrial Average stood at 40,943.77, down 1.5 percent.

The broad-based S&P 500 fell 2.0 percent to 5,536.40, while the Nasdaq Composite Index shed 3.0 percent to 17,177.28.

"I think there's just profit taking, kind of rebalancing going on there," said Sam Burns, chief strategist of Mill Street Research. "And now that earnings season is over, there's much less in terms of corporate news to drive things."

The Institute for Supply Management's manufacturing index was 47.2 percent in August, up slightly from a month earlier, but still well below the 50-point mark separating expansion from contraction.

ISM officials said demand remained subdued, leading to a fifth straight month of contraction.

The stock market losses come ahead of major employment data later in the week that will have a say in upcoming US monetary policy decisions.

The CBOE Volatility Index, a closely-watched benchmark in equity markets, spiked Monday.