It dashed economists' belief that August's contraction was an aberration, and stocks and bond yields immediately reversed course to drop sharply lower. Wall Street looked set to extend losses Wednesday, with the future contract for the S&P 500 down 0.6% to 2,921. The Dow future was also down 0.6% at 26,363.
In Europe, Germany's DAX declined 1.4% to 12,088 after a group of leading think tanks joined the German government and others in cutting its economic forecast for Europe's largest economy. The CAC 40 in Paris shed 1.7% to 5,503.
Britain's FTSE 100 sank 2% to 7,212 after Prime Minister Boris Johnson said there would be "grave consequences for trust in our democracy" if Brexit is delayed beyond Oct. 31. Johnson said his final proposal Wednesday is a "fair and reasonable compromise," but it is likely to face deep skepticism from EU leaders, who doubt the U.K. has a workable plan to avoid checks on goods or people crossing the border between EU member Ireland and the U.K.'s Northern Ireland after Brexit.
In Asia, Japan's Nikkei 225 index shed 0.5% to 21,778.61 while the Hang Seng in Hong Kong lost 0.2% to 26,042.69. Sydney's S&P ASX 200 gave up 1.5% to 6,639.90. Markets in mainland China were closed for National Day holidays. They reopen on Oct. 8. India's markets area also closed.
The Kospi in South Korea sank 2% to 2,031.91 after North Korea fired a ballistic missile toward the sea, according to South Korea's military. The display of Pyongyang's expanding military capabilities came just hours after it said it would resume nuclear diplomacy with the United States this weekend.
Manufacturing is a relatively small part of the U.S. economy, but investors fear the doldrums might spill into other areas. That puts an even bigger spotlight on a jobs report due out Friday, which economists expect to show an acceleration in hiring.
"Granted, manufacturing equates to a mere 11% of U.S. GDP, but the market ... is incredibly sensitive to the outcome," said Chris Weston of brokage Pepperstone. The protracted trade war with China is hammering export manufacturing. It also raises uncertainties over the future rules of international trade, causing CEOs to curb spending.
ENERGY: Benchmark crude oil rebounded, gaining 22 cents to $53.84 per barrel in electronic trading on the New York Mercantile Exchange. It fell 45 cents to $53.62 a barrel on Tuesday. Brent crude oil, the international standard, was flat at $58.89 per barrel.
CURRENCIES: The dollar slipped to 107.52 Japanese yen from 107.73 yen on Tuesday. The euro dropped to $1.0930.