The S&P/TSX composite index dropped 155.07 points to 14,805.44 after racking up a 4.25 per cent loss with traders also nervous about the pace of future U.S. interest rate hikes.
New York markets also sold off and the Dow Jones industrials plunged 238.19 points to 16,804.71 as the Institute for Supply Management's manufacturing index came in at 56.6, down from 59 in August and much weaker than the 58 reading that economists had expected. It also added to weak manufacturing reports in recent days from China and Europe.
"It's been sort of a two-speed world — there's been the U.S. data which has been pretty good, you can't really complain, and then everywhere else has been a lot weaker," said Michael Greenberg, co-lead manager of Franklin Quotential Portfolios.
The Nasdaq fell 71.3 points to 4,422.09 and the S&P 500 index was down 26.13 points to 1,946.16.
The Canadian dollar was up 0.22 of a cent to 89.51 cents US as the greenback weakened following the mid-morning release of the manufacturing data.
Greenberg added that investors will soon be turning their attention to third-quarter corporate earnings which could be hurt by weak overseas performance.
"It will be interesting to watch earnings, especially the bigger multinationals because the home market has been pretty good, but some of these, we're a bit worried about earnings because of foreign exposures."
Markets failed to benefit from a positive look at health of the American job market two days before the release of the U.S. government's employment report. Payroll firm ADP said that the American private sector created 213,000 jobs last month, in line with expectations.
Economists are expecting the U.S. Labor Department to report Friday that 215,000 jobs were added in September.
Investors also focused on shares of companies testing Ebola vaccines after the first U.S. case of the disease was diagnosed in Texas.
Burnaby, B.C.-based drug company Tekmira Pharmaceuticals (TSX:TKM) (Nasdaq:TKMR) was a major advancer. Its stock jumped 18 per cent to US$24.95 in New York. In August, the U.S. Food and Drug Administration told Tekmira it would allow use of its investigational drug TKM-Ebola in patients with the virus.
Most TSX sectors were lower with declines led by a 2.1 per cent drop in the industrials group. Airline stocks fell as investors worry the Ebola scare will drive passengers away. Air Canada (TSX:AC.B) shed 39 cents or 4.55 per cent to C$8.16. Elsewhere in the segment, shares in Westport Innovations (TSX:WPT) plunged almost 25 per cent to $8.84 after the natural gas engine firm cut its revenue guidance for 2014.
The energy sector gave back 2.1 per cent as November crude in New York erased early strong gains to decline 43 cents to US$90.73 a barrel. Prices have fallen sharply lately to two-year lows amid falling demand and plentiful supplies.
The base metals group was 1.3 per cent lower as December copper edged up two cents to US$3.02 a pound.
The gold sector edged slightly higher while December gold gained $3.90 to US$1,215.5 an ounce.