Wall Street fell sharply, with the Dow Jones closing down 468 points, or 2.8%, at 16,060.
European markets also fell, with the UK's FTSE 100 closing down 3% and France's Cac 40 and Germany's Dax about 2.4% lower.
Earlier, figures for August showed factory activity in China contracting at its fastest pace in three years.
The official manufacturing purchasing managers' index (PMI) dropped to 49.7 from 50 in July. A figure below 50 indicates contraction.
It follows recent turmoil in the markets sparked by concerns over a slowdown in the world's second-largest economy.
"The importance of today's announcement is that the slowdown is hitting the larger state-backed firms who typically take longer to feel the pain," said Josh Mahony from online trading firm IG Index.
"There are precious few signs that China is beginning to recover, and while [the People's Bank of China's] action can provide a temporary reprieve, we are yet to see any evidence that it is doing any good to the economy," he added.
There were also big falls in the price of oil, which had risen by about 25% in the previous three trading sessions.
Brent crude fell $4.59 to $49.56 a barrel while US crude dropped $3.79 to $45.41.
Exxon Mobil was the biggest faller on the Dow Jones, closing down by 4.2%. Chevron fell 3.5%.
The S&P 500 fell 3.0% to close at 1,914, while the tech-heavy Nasdaq was 2.9% lower at 4,636.
Global markets sustained heavy losses in August - for both the UK's FTSE 100 and the US's S&P 500, it was the worst month since May 2012.
As well as the poor China factory data, investors are unsure about the US central bank's next move. Many had pencilled in the a rate rise - the first move since the financial crisis - for September. However, given the recent stock turmoil, analysts seem less certain.
"The volatility is here to stay for a while, or at least till the Fed gives us an indication regarding a rate increase," said Art Hogan, chief market strategist at Wunderlich Securities in New York.
"Right now, they are being quite cagey."
Renewed fears over growth in China have hit global stock markets, with the main indexes falling sharply.