The euro and most commodity prices also fell, as investors' search for safety drove up U.S. government bonds and the dollar.

 

Adding to a string of global data that has crushed growth-related assets in the past three months, China's manufacturing sector contracted for a third straight month in September while German retail sales slumped at their sharpest pace in more than four years.

 

An unexpected rise in euro zone inflation for September also moderated hopes the European Central Bank would cut interest rates to support weakening European demand. The euro was headed for its worst quarter against the dollar since mid-2010.

 

"The combination of sovereign debt crisis, a slowing economy and really what appears to be ineffective leadership in Europe has led to this decline, and we expect that to continue to play out in the fourth quarter," said Omer Esiner, chief market analyst at Commonwealth Foreign

Exchange in Washington.

 

U.S. stocks fell, putting the benchmark S&P 500 on course for its worst quarter since the collapse of Lehman Brothers in 2008.

 

An index of global stocks was on track for a 17 per cent decline for the quarter, while U.S. crude oil prices was headed for a more than 15 per cent fall. Copper, a key industrial metal that is a proxy for growth expectations, was on track for a 25 per cent slide for the quarter.

 

Through Thursday's close, the MSCI All Country World Index lost about $4.7 trillion in market capitalization, according to Thomson Reuters Datastream.

 

The contraction in China's factory sector for a third straight month weighed on sentiment, said Ken Polcari, managing director at ICAP Equities in New York.

 

"Which brings you back to Europe and that situation has not gone away at all," he said. "What the market is saying is they are not waiting much longer to see what the plan is. And even if they do, they are going to judge it pretty harshly."

 

In afternoon trading in New York, the Dow Jones industrial average was down 37.31 points, or 0.33 per cent, at 11,116.67. The Standard & Poor's 500 Index was down 8.39 points, or 0.72 per cent, at 1,152.01. The Nasdaq Composite Index was down 18.74 points, or 0.76 per cent, at 2,462.02.

 

European shares unofficially fell 1.6 per cent for the day, down for a fifth straight month and down 17.3 per cent for the quarter --the worst quarterly performance since the three last months of 2008.

 

Carmakers and mining stocks were among the worst performers, hit by the news of slowing growth in China -- the world's second largest economy and an engine of global growth.

 

The euro slipped versus the U.S. dollar and was on course for its biggest monthly drop in nearly a year, weighed down by the lack of a visible solution to the euro zone's deepening debt troubles.