World stock markets tumbled on Friday and US oil prices dove briefly below $40 a barrel sparked by fresh evidence of slowing growth in China, sending investors scurrying to the safety of bonds and gold.

Stocks on Wall Street and in Europe fell more than 3 per cent in a global rout spurred by a more than 4 per cent fall in Shanghai stocks.

Thomas Lee, managing partner at Fundstrat Global Advisors in New York, said it was hard to say what was behind the sell-off in stocks but a market bottom may be close at hand.

"There's no shortage of things people can cite, from the movement in currencies, to the weakness in commodities and fears about China," Lee said. "But at the end of the day if people are trying to take down risk, then it's going to make sense for them to sell their exposure in equities as well."

Crude posted its longest weekly losing streak in nearly 30 years and emerging market stocks, bonds and currencies all fell, with slowing Chinese growth withering demand for commodities from developing countries.

China's manufacturing sector shrank at its fastest rate in more than six years in August, according to a survey from private data vendor Caixin/Markit.

World markets had already been on edge after China's surprise devaluation of the yuan last week and a more than 30 per cent fall in its stock markets since mid-year.

The US dollar fell too, dropping to a two-month low against the euro, as the Chinese data and falling commodity prices eroded expectations the Federal Reserve will raise US interest rates next month.

"The Fed is in an extremely awkward situation right now," Robbert van Batenburg, director of flow strategy at Societe Generale. "You have across-the-board competitive currency devaluations that will invoke the deflationary monster here in the US"

The Dow industrials, Nasdaq 100 and major European stock indices have now fallen more than 10 per cent from their peak earlier this year.

The pan-regional FTSEurofirst fell 3.4 per cent to 1,427.13, its worst day since November 2011, as traders shrugged off upbeat euro zone manufacturing and services data in a third straight day of selling.

MSCI's emerging markets index was at its weakest in four years, off 2.16 per cent, while the firm's all-country world stock index fell 2.7 per cent.

The Dow Jones industrial average fell 530.94 points, or 3.12 per cent, to 16,459.75. The S&P 500 slid 64.84 points, or 3.19 per cent, to 1,970.89 and the Nasdaq Composite lost 171.45 points, or 3.52 per cent, to 4,706.04.

A US recession is not in sight, and with stock valuations such as price to earnings, to book and to sales at or close to 25-year averages, the sell-off may be overdone, said David Kelly, chief market strategist at JPMorgan Asset Management.

"If you're fully invested, just enjoy the rest of the summer," Kelly said. "If you're sitting on cash waiting for a buying opportunity, well guess what, this is the buying opportunity."

OIL AND EMERGING MARKETS HIT

Crude oil fell again as oversupply from members of the Organization of the Petroleum Exporting Countries in particular continues to overwhelm slowing demand.

US crude was at a more than six-year low as it posted an eighth straight weekly decline. The US benchmark traded briefly below $40 a barrel before settling down 87 cents at $40.45. Brent fell $1.16 to settle at $45.46.

Oil's run of weekly losses is its worst since 1986.

Emerging market currencies in the Americas tracked Asian markets lower, with the Colombian and Mexican pesos as well as Brazil's real falling more than 1.0 per cent against the dollar.

Earlier in Asia, the Malaysian ringgit hit a pre-peg 17-year low and South Korea's won took its losses to 1.8 per cent against the dollar this week.

Gold, seen as a good asset in difficult times, rose to its highest in more than a month. US gold futures for December delivery settled up 0.6 per cent at $1,159.60 an ounce.

Yields on safe-haven US Treasuries slipped further, with the benchmark 10-year note rising 10/32 in price, pushing its yield down to 2.0487 per cent.

Lower Treasury yields and the stronger euro weighed on the dollar. The greenback traded down 1.01 per cent at 122.14 yen and against the euro, the dollar fell 1.17 per cent to $1.1373. – Reuters