Stocks tumbled on both sides of the Atlantic overnight after a private survey suggested manufacturing activity in China contracted for the first time in six months in January.

The flash Markit/HSBC China Manufacturing Purchasing Managers’ Index fell to 49.6 in January, below the key 50-point level that indicates growth in the manufacturing sector.

On Wall Street, investors weighed up some mixed news on the US economy. Labor Department figures showed claims for unemployment benefits rose by less than expected last week, up 1,000 to 326,000 on a seasonally adjusted basis.

But figures from the National Association of Realtors showed sales of existing homes rose by 1 per cent last month, which was lower than expected, and the Markit preliminary US Manufacturing Purchasing Managers Index fell to 53.7 in January, pointing to a slowdown in the US manufacturing sector.

The blue chip Dow Jones Industrial Average dropped 1.1 per cent to close at 16,197, the benchmark S&P 500 index lost 0.9 per cent to 1,828 and the technology weighted Nasdaq Composite Index lost 0.6 per cent to 4,219.

It was also a gloomy session on European stock markets; in London, the FTSE 100 lost 0.8 per cent to close at 6,773, the DAX in Germany fell 0.9 per cent to 9,631 and the CAC 40 in France lost 1 per cent to 4,281.

Futures trading suggests Australian stocks will also drop at the open following those weak leads; the ASX SPI 200 futures index is down 0.6 per cent at 5,197.

In commodity trade the spot price of gold jumped to $US1262 an ounce, while West Texas Crude oil rose to $US96.73 a barrel and in Singapore Tapis crude oil was also higher at $US115.98 a barrel.

On currency markets the Australian dollar dropped against most of its major counterparts after the release of the weak manufacturing news from China.

At 8:10am (AEDT) it was buying 87.7 US cents, 64 euro cents, 90.4 Japanese yen, 52.7 British pence and less than $NZ1.06.