Flagging demand dragged China's giant factory sector into its sharpest contraction in 6-1/2 years in September, a private survey showed on Wednesday, triggering a flight to safety in Asian markets.

The bleak data came after the US central bank refrained from lifting interest rates for the first time in nearly a decade last week, citing concerns that global problems, and China's slowing economy in particular, may hurt the US recovery.

The preliminary Caixin/Markit China Manufacturing Purchasing Managers' Index (PMI) fell to 47.0 in September, the worst since March 2009, missing market expectations for 47.5 and slipping from August's final 47.3.

Levels below 50 signify a contraction.

It was the seventh consecutive that China's manufacturing sector had shrunk, and the survey showed business conditions deteriorating almost across the board, as firms slashed output, prices and jobs at a faster pace as orders fell.

While other PMIs from the US and Europe due out later on Wednesday are likely to point to resilient factory growth outside China, analysts said there were risks that activity may have softened too, due in part to Europe's refugee crisis.

"It's a sea of red on the screens so far today," said Annette Beacher, chief Asia Pacific strategist at TD Securities in Singapore. "No doubt the upcoming European session will adopt this risk-off tone across the asset classes."

The euro zone Markit manufacturing flash PMI is expected to hold steady at 52.0 in September, a Reuters poll showed, little changed from last month's 52.3. The US Markit flash manufacturing PMI was also forecast to stay unchanged at 53.0 this month.

MSCI's broadest index of Asia-Pacific shares outside Japan fell as much as 2.5 per cent at one point on Wednesday in its biggest daily fall since August 24., as investors sought refuge in US Treasuries.

STRONG HEADWINDS

Global investors and policymakers have been on edge over the health of China's economy this year, as it looked set to log its weakest performance in at least a quarter of a century.

A plunge in China's stock market over the summer and a surprise devaluation in the yuan have roiled global markets, and raised doubts inside and outside China over Beijing's ability to manage the world's second-largest economy.

There are signs that China's stumbling economy have unnerved companies, financial markets and consumers around the world.

Sentiment at Asia's top companies soured in the third quarter to a near four-year low as some executives ranked the Chinese market as their top risk, a Thomson Reuters/Insead Asian Business Sentiment Index showed on Wednesday.

In the US, a study showed well-heeled shoppers spooked by a whipsawing stock markets and shoppers waiting for the best deals could result in the weakest US holiday sales season for retailers this year since a recession in 2010.

And despite China having slashed interest rates five times since November, small- and mid-sized Chinese firms are still starved for funds due to banks' preferences to lend to big, state-owned companies.

Accounting for up to 80 percent of urban employment and 60 percent of China's GDP, the woes of small Chinese companies could be harbinger of the hard times ahead.

Euler Hermes, a seller of trade insurance, predicted this week that corporate bankruptcy in China could surge 50 per cent in the next two years to nearly 4,000 cases.

"The multi-year low in the PMI confirms the economy will face strong headwinds before finding a new steady state," economists at Barclays said in a note on Wednesday.

"We continue to look for more fiscal and monetary easing in Q4 to support growth, but do not expect that to change the economy's structural softening trend." - Reuters