NEW YORK (Reuters) - Global stocks slid on Tuesday as data showed U.S. manufacturing shrank at the sharpest clip in more than three years last month, while expectations the European Central Bank could buy more bonds chipped away at Spanish and Italian yields.
A separate report showing U.S. construction spending fell in July by the most in a year provided additional fuel to hopes for more Federal Reserve stimulus, with investors looking forward to Friday's August U.S. employment data.
Should that report also prove weak, the Fed could embark on another round of bond buying, or quantitative easing, to prop up the world's biggest economy.
Those expectations got a boost last week when Fed Chairman Ben Bernanke left the door wide open to a further easing of monetary policy, saying the stagnation in the U.S. labor market was a "grave concern," though he stopped short of immediate promises.
The Dow Jones industrial average .DJI fell 92.80 points, or 0.71 percent, at 12,998.04. The Standard & Poor's 500 Index .SPX was down 7.74 points, or 0.55 percent, at 1,398.84. The Nasdaq Composite Index .IXIC was down 16.73 points, or 0.55 percent, at 3,050.24.
"What people saw with today's U.S. ISM and the manufacturing data in Asia and Europe yesterday is that the global economy is still slowing down. In particular, cyclical stocks are pretty weak today," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
The euro also slid against the dollar, dropping to $1.2561 after having risen as high as $1.2627 earlier in the session.
Investors were also eyeing possible action across the Atlantic from the European Central Bank, with hopes for more bond buys from the ECB helping drive Spanish and Italian bond yields to multi-week lows.
Spanish two-year yields dropped to 3.16 percent, the lowest since early April, while their Italian counterparts fell to 2.43 percent, the lowest since late March.
The benchmark 10-year U.S. Treasury note was down 6/32, with the yield at 1.5671 percent.
The ECB is expected to unveil a new debt-purchasing plan to tackle the region's debt crisis at a policy meeting o n T hursday, when it may also cut interest rates as the 17-nation euro area heads toward a recession.
Spanish & Italian bonds: link.reuters.com/vur47s
Gold price Fed assets & QE: link.reuters.com/byw79s
ECB in graphics: link.reuters.com/neg32s
Mario Draghi, the ECB's president, told European lawmakers o n M onday that buying short-term sovereign debt did not breach any European Union rules, which investors took as a sign the bank would resume purchases of short-dated Spanish and Italian bonds.
"Markets are taking a bit of confidence from Draghi, who apparently indicated that purchases of up to three years maturity wouldn't be in contravention of EU policies on financing of sovereigns," said Brian Barry, a strategist at Investec.
Still, European equity investors have turned more cautious over the impact of the ECB plan, having enjoyed a strong rally since Draghi pledged on July 26 to do "whatever it takes" to protect the euro from the crisis.
The weak U.S. data also knocked European shares, adding to market uncertainty.
The FTSEurofirst 300 .FTEU3 ended down 1.1 percent at 1,079.81, albeit in thin trading volume of just 62 percent of the 90-day daily average.
"If the ECB disappoints, the reaction would be on the negative side. But I don't expect a dramatic sell-off as focus will shift to other events," said Christian Stocker, equity strategist at UniCredit.
The MSCI world equity index .MIWD00000PUS, which gained late last week on renewed hopes of more monetary stimulus by the Federal Reserve, was down 0.72 percent at 320.39.
Oil prices fell below $115 per barrel on Tuesday as renewed fears about weaker demand outweighed hopes of further stimulus measures from central banks in the United States and Europe.
Front-month Brent crude futures were down $1.08 to $114.70 a barrel. U.S. crude futures were down 1.22 cents to $95.25 a barrel from Friday's settlement.
(Additional reporting by Richard Hubbard in London and Julie Haviv in New York)