U.S. stocks recorded their worst monthly drop in more than three years on worries about the health of China's economy and the timing of a U.S. interest rate hike.
All three major indexes closed down on Monday after the markets failed to recover from weekend comments from Federal Reserve Vice Chairman Stanley Fischer in which he appeared to keep the door open for a rate hike in September.
The Dow Jones industrial average lost 0.69 percent to end at 16,528.03 points and the S&P 500 fell 0.84 percent to 1,972.18. The Nasdaq Composite dropped 1.07 percent to 4,776.51.
Fischer, the No. 2 Fed official, said U.S. inflation would likely rebound as pressure from the dollar fades, allowing the Fed to raise interest rates gradually.
Fischer's remarks at the global central banking conference in Jackson Hole, Wyoming, suggest the Fed could look beyond a week of stock market turmoil brought on by persistent fears that China's economy is faltering.
"What you see in the market today is caused by Fischer's comments over the weekend. If they move in September, it's going to cast a lot of doubt about where they will stop," said Stephen Massocca, chief investment officer at Wedbush Equity Management LLC in San Francisco.
John DeClue, chief investment officer of U.S. Bank Wealth Management, said speculation about the timing of the Fed's move will likely continue to drive the markets.
"We can still expect to see some significant drops in the market till we get some direction from the Fed regarding a rate increase," he said. "However, we still think there is a less than 50 percent chance of a rate hike in September because we're not really seeing a rise in inflation and unless we get an unbelievably strong jobs report this week, December still seems more likely."
Investors will be keeping a sharp eye on economic data again this week, especially the monthly jobs report on Friday, the last one before the Fed meets on Sept. 16-17.
The U.S. central bank has said it will raise rates only when it sees a sustained recovery in the economy. While the job market has improved steadily, inflation has remained below the central bank's 2 percent target for more than three years.
A decade of near-zero interest rates has helped the U.S. stock market stage a spectacular bull-run since the financial crisis. But fears about the health of the Chinese economy buffeted global stock markets this month and pushed prices of oil and other commodities lower.
Wall Street closed flat on Friday after a tumultuous week in which the Dow slumped more than 1,000 points at one point last Monday. The market subsequently rallied, posting its biggest two-day gain since the financial crisis.
At 11:04 a.m. ET on Monday, the Dow Jones industrial average was down 134.89 points, or 0.81 percent, at 16,508.12, the S&P 500 was down 16.08 points, or 0.81 percent, at 1,972.79 and the Nasdaq composite was down 33.66 points, or 0.70 percent, at 4,794.67. The S&P and the Nasdaq look set to post their biggest monthly loss since May 2012, while the Dow is on track for its worst monthly loss since 2010.
The CBOE Volatility index, known as Wall Street's "fear gauge," rose about 8 percent to 28.15 on Monday, above its long-term average of 20. It spiked to as much as 53.29 last week.