Fears that the U.S. Federal Reserve may soon begin yanking the monetary policy rug out from under markets sent global markets reeling on Thursday, with U.S. stock index futures indicating a lower open and major indexes around the world plunging.
U.S. futures had trimmed losses earlier but were back around their morning lows..
After Wednesday's delicately-balanced testimony by Fed Chairman Ben Bernanke and minutes from the Fed's last meeting, weak Chinese data converged with jitters that policymakers policymakers could begin tapering its stimulus this year.
The Standard & Poor's 500 hit its all-time high Wednesday morning as Bernanke spoke, then reversed and closed lower by 1 percent, an event that has happened only three times since 2000, according to Bespoke Investment Group.
The Japanese Nikkei closed 7 percent down, its worst tumble in several years, while Europe's stocks also fell sharply.
"Today's slump is not necessarily the end of the bull market in Japanese equities, but the next few months will be much harder going," Julian Jessop, chief global economist at Capital Economics, said in a note.
Capital had been predicting a 15 percent correction in Japanese equities, as Jessop said "the boost to the Nikkei from a weaker yen has probably runs its course."
(Read More: Nikkei Closes Down Over 7% After Volatile Session)
Asian markets were dealt a second blow on Thursday when a preliminary survey of China's manufacturing sector raised alarm bells about the health of the world's second-largest economy. China's HSBC Flash Purchasing Managers' Index (PMI) fell to a seven-month low of 49.6 in May, slipping under the 50-point level into contraction. Basic resource stocks in Europe saw a sell-off on the news, sinking 2.81 percent in morning trade.
(Read More: Perfect Storm Sparks Massive Nikkei Sell-Off)
On Wednesday, U.S. stocks closed nearly 1 percent down after a volatile session, after the minutes from the last Fed policy meeting suggested the central bank was divided on when it may start to pull back on monetary stimulus.
(Read More: Volatile Trading Day Keeps Focus on Fed, Jobs Data)
The Fed minutes noted that "a number of participants expressed willingness" to reduce quantitative easing as early as June, if economic data suggested sufficiently strong and sustained growth. However, officials differed about what evidence would be necessary, and the likelihood of it materializing.
The minutes also indicated that Fed members believe Wall Street is overestimating the extent of future central bank easing, and also indicated significant growth in the money supply.
In his Congressional testimony earlier in the day, Fed Chairman Ben Bernanke reiterated the central bank's intention to "maintain highly accommodative monetary policy as long as needed". He added that any near-term decision on scaling back bond purchases depended on an improvement in jobs data.
"Our conclusion is that Bernanke and other senior Federal Open Market Committee members have enough influence to persuade the committee to wait at least through to September before deciding on tapering back QE3 [the Fed's third round of quantitative easing]," said Derek Halpenny, the European head of global markets research at Bank of Tokyo-Mitsubishi, in a research note on Thursday.
"Only if there was a notable upturn in the average monthly increase in non-farm payrolls would we see the FOMC moving earlier than that."
Initial jobless claims fell to 340,000 for the week ended May 18 from 363,000 the prior week. Analysts polled by Reuters forecast first-time claims would fall to 345,000 last week.
Thursday's session will also bring more housing market indicators, with the release of April's new home sales data and the FHFA (Federal Housing Finance Agency) home price index for March. And in the bond markets, the Fed is due to purchase $3-3.75 billion of 6-7-year Treasury notes, while the Treasury will sell 10-year TIPS (Treasury Inflation Protected Securities).
In the last busy week in first quarter earnings season, a number of companies are due to report before the start of U.S. trade, including Dollar Tree, ING U.S., Toronto Dominion, Sears Holdings, Ralph Lauren and Hormel Foods. Gap, Salesforce.com, Williams-Sonoma, Zumiez, Pandora and Aeropostale will then report after the closing bell.
—By CNBC's Katy Barnato