Leading the global decline in stocks Monday, Chinese stocks plunged after Caixin manufacturing PMI showed continued contraction in that area of the economy.
The Shanghai and Shenzhen exchanges ended the trading session early after the CSI 300 dropped 7 percent, triggering a circuit breaker. The halt was the first implementation of the new circuit breaker rule announced in September.
Read MoreChina's new circuit breaker may have worsened drop
U.S. data released Monday morning reaffirmed concerns about global manufacturing. The U.S. December ISM Manufacturing Index was 48.2, down from November's 48.6 print to its lowest since June 2009.
"That's not helping because last week we had a couple more minor PMI readings and they showed the same thing," said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
Last Thursday, the Chicago PMI came in at 42.9 for December, down from 48.7 in November.
The S&P 500 closed about 1.5 percent lower, holding above the psychologically key 2,000 level. In intraday trade, the index fell more than 2.5 percent to fall below that level for the first time since mid-December.
"We took out 2,000 on the S&P 500 and 17,000 on the Dow. That (may be) creating some levels for some selling going down," Peter Coleman, head trader at Convergex, said of the mid-morning decline in stocks.
Financials closed down more than 2 percent to lead all S&P 500 sectors lower.
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The Nasdaq composite closed below the psychologically key 5,000 level for the first time since Dec. 21, 2015.
Apple eked out a gain of 0.09 percent after earlier falling more than 3 percent, while the iShares Nasdaq Biotechnology ETF (IBB) closed down about 3.4 percent.
Chinese e-commerce site JD.com fell nearly 8.5 percent and Tesla closed down almost 7 percent as the greatest decliners in the Nasdaq 100. Amazon was the third-greatest decliner, down 5.76 percent.
"A lot of it has to do with China and a lot of it is overdone," said Art Hogan, chief market strategist at Wunderlich Securities. "The China PMI hasn't changed much. It's not unusual to have an outsized reaction when you've got a base case that 2016 could be a tough year."
"I think it's very much global markets are in a risk-off mode. It's very hard to step in the way of (that)," he said.