This occurred even though the People's Bank of China raised the midpoint rate of the yuan to 6.3966 per dollar—slightly firmer than the previous fix of 6.3969.
Among China's other indexes, the blue-chip CSI300 and the smaller Shenzhen Composite plummeted 6.2 and 6.6 percent, respectively.
"With today's unsurprising yuan fixing, volatility in the [yuan] appears to have been put back in its box. However, the internal dynamics of China's economy continue to flash warnings that this calm will not last," Angus Nicholson, IG market analyst, wrote in a note.
Back in the U.S., in what is usually a low-volume time of year, earnings could also have a big influence on trade. Dow components Wal-Mart and Home Depot reported ahead of the opening bell.
Home Depot, the world's No. 1 home improvement retailer, reported on Tuesday a better-than-expected rise in quarterly same-store sales, helped by a recovery in the U.S. housing market.
Wal-Mart posted earnings of $1.08 a share and cut its guidance. Analysts had expected Wal-Mart to report earnings of $1.12 a share on $119.72 billion in revenue, according to a consensus estimate from Thomson Reuters.
Home Depot was trading at an all-time high Monday, while Wal-Mart has been a laggard and is 21 percent down from its January high.
Analog Devices will release numbers after the bell.
On the data front, Tuesday saw U.S. housing starts for July come in at 1.206 million, higher than the expected 1.17 million. This came ahead of Wednesday's release of the minutes of the end-July Federal Open Market Committee meeting.
The timing of the U.S. central bank's first rate hike in nine years has been a constant source of debate in the markets, as traders await the final pieces of economic data the Fed will take to its September rate meeting. Minutes of the Fed's July meeting could give them some clarity.
Oil prices were also in focus on Tuesday as prices remained under pressure. Brent crude traded down 0.64 percent around $48.43 per barrel, while U.S. crude traded down a similar amount around $41.60. Both benchmarks are now almost a third below their last peak in May, with data showing speculators have taken huge bets on further falls, according to Reuters.
In Europe, equities were on edge after the weakness seen in the Asian session. Investors were also looking ahead to Wednesday's vote in the German parliament on Greece's third bailout.
Meanwhile, in Greece, the government appears likely to call a confidence vote following a revolt among far-left lawmakers from the ruling Syriza party over the country's new bailout deal.
--With contribution from CNBC's See Kit Tang.