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Markets Routed Again Over China Economy Fears

Uncertainty about how quickly China’s economy is weakening hammered U.S. stocks on Thursday, sending the Dow Jones average down about 392 points.

Uncertainty about how quickly China’s economy is weakening continued to hammer U.S. stock markets on Thursday, sending the Dow Jones industrial average down 392 points — or 2.3 percent of its total value — for its biggest loss in three months.

Reuters reported that the Dow’s 5.2 percent decline in the first four trading days was its worst performance to begin a year since the 30-stock index's creation in 1928.

The Standard & Poor's 500 index and the Nasdaq composite also were creamed, with the former losing 47 points, or 2.4 percent, and the latter sliding 146 points, or 3 percent.

The Dow and Nasdaq ended the day more than 10 percent below their 52-week intraday highs, officially entering what economists consider a market "correction." The S&P 500 was just short of the threshold, about 9 percent away from its 52-week high.

Thursday’s battering of the markets followed a similar pounding on Wednesday and was the third negative trading session out of four in the new year. Technology stocks have been some of the hardest hit. The tech-heavy Nasdaq composite has plunged 8 percent since Dec. 29.

Markets around the world were spooked by a steep drop in Chinese stocks. The superpower had to halt trading earlier Thursday when losses plummeted 7 percent. The 29-minute session was the shortest trading day ever in the CSI 300 Index's 25-year history.

The China Securities Regulatory Commission later suspended its so-called circuit breaker system, which suspends trading for 15 minutes in the event of a 5 percent selloff and halts it for the day if it reaches 7 percent, as happened Thursday. The move appeared to be an acknowledgement that the newly rolled out system was exacerbating panic selling.

The selloff in China was sparked by reports that indicate slower growth for the world's second-largest economy and by Beijing allowing the country's currency, the yuan, to take its biggest fall in five months to reach its lowest level against the dollar since March 2011.

After registering big declines in early trading in reaction to the Chinese trading halt and steep declines in European markets, U.S. markets stabilized in early afternoon only to be hammered by a Reuters report citing sources as saying that China's central bank is under increasing pressure from policy advisers to let the yuan currency fall quickly and sharply, by as much as 10-15 percent.

With Beijing accelerating the yuan's depreciation to make its exports more competitive, investors fear China's economy is even weaker than had been imagined.

Implications for the global economy

The health of China's economy has big implications for countries all around the world even though the U.S. economy is doing fairly well and Europe's economy looks healthier. But the opacity of Bejing’s plans for its currency and stimulating its slowing economy add to the uncertainty of markets around the world.

"China's been such a big driver of global growth for 15 years and now they're not, and they don't seem to have a plan for the next 15 years," John Canally, chief economic strategist at LPL Financial, told the Associated Press. Canally says investors don't know if the Chinese government is doing a good job of managing the nation's economy. To make matters worse, he said, the markets don't have many facts to go on.

Canally said investors don't have many reliable measurements of China's service sector as opposed to its manufacturing sector, which has been the core of its economy for years. He said investors might feel better in February or March, when the government could disclose more details about its economic goals and plans.

Adding to the gloom, oil slid below $33 a barrel to near 12-year lows before regaining some ground. Still, oil prices are down about 70 percent since mid-2014.

Not all the skittishness is attributable to action on the far side of the Pacific. Investors also are concerned about the pace at which the Federal Reserve will hike interest rates this year.

Richmond Federal Reserve President Jeffrey Lacker set a hawkish tone on Thursday, saying the central bank may need to raise interest rates more than four times this year if oil prices stabilize, the dollar stops appreciating and inflation surges toward the U.S. central bank's 2 percent target.

However, fed funds futures contracts show that traders expect the Fed to raise rates at least twice in 2016, and are reducing bets on a third hike by December.

Billionaire investor George Soros, speaking at an economic forum in Sri Lanka, drew similarities between the present environment and the financial crash of 2008. He said global markets are facing a crisis and investors need to be very cautious, Bloomberg reported.

The year on Wall Street began Monday with a furious market selloff, and the Dow ultimately dropped more than 250 points, or 1.47 percent, by Wednesday's closing bell. It marked the worst beginning to a trading year since Jan. 2, 2008, when the Dow fell 1.66 percent.

Major international news also has been testing the markets this week, from the Saudi Arabia-Iran diplomatic conflict to North Korea’s testing of an apparent nuclear device.

On Thursday, China's Shanghai composite closed 7.32 percent lower, while the Shenzen composite closed 8.11 percent lower. In Japan, the Nikkei finished 2.33 percent lower, CNBC reported.

European Shares Fall Sharply as China Halts Trading Again

European markets were equally roiled: The pan-European FTSEurofirst 300 index and the euro zone's blue-chip Euro STOXX index were both down 2 percent.

Meanwhile, U.S. investors will be eyeing Friday’s employment report from the Labor Department. Early indications are that the report will be positive, based on reports Thursday showing weekly jobless claims dropping sharply in late December and the lowest number of layoffs in 15-1/2 years.

CNBC's Eveyln Cheng, the Associated Press and Reuters contributed to this report.