The disconcerting economic news from overseas overshadowed other reports that suggested the U.S. economy is gaining momentum.
The Dow Jones industrial average closed down 78.48 points, or 0.6 percent, at 13,046.14.
Eight out of 10 sectors declined in the S&P 500, led by energy and materials as investors worried about a drop in global demand for oil and raw materials.
China has released a string of worrisome economic reports recently. The latest, on Thursday, signaled that its manufacturing sector could be contracting. A manufacturing index compiled by HSBC fell to 48.1 in March from 49.6 in February. Figures below 50 indicate that manufacturing is contracting.
That's a negative sign because growth in China has played a key role in shoring up the global economy since the financial crisis of 2008.
China is also the world's largest consumer of raw materials, so a slowdown there would affect those companies. US Steel Corp. tumbled 5.82 percent, and copper wire and bar manufacturer Freeport-McMoRan Copper Gold Inc. lost 3.7 percent.
It didn't help that another survey in Europe also pointed to slower growth. The purchasing managers' index from Markit, a financial information company, fell to a below-forecast 48.8 points in March from 49.3 a month earlier. The index combines both the services and manufacturing sectors in Europe.
Those signs of a deceleration in key global markets dwarfed the latest positive news on the U.S. economy. The number of Americans seeking unemployment benefits fell 5,000 to a four-year low last week, bolstering the view that the job market is strengthening. A measure of future U.S. economic activity, the Conference Board's index of leading economic indicators, rose 0.7 percent in February for the fifth straight month, more evidence that the economy is gaining momentum.
The poor economic news from abroad also hurt FedEx Corp.'s stock, which fell 4 percent. Chief financial officer Alan Graf said the current global economic environment and higher fuel prices are driving more customers to "trade down" or choose slower methods of shipping to save money, just like they did during the recession. Investors decided to focus on his comments, rather than the company's stellar performance. FedEx's quarterly profit more than doubled between December and February after it shipped more packages and charged higher prices.
While news out of China has been bad for global company stocks, it may provide some relief to consumers with oil prices falling. Gasoline has risen 59 cents per gallon since Jan. 1 and the average price nationwide is above $4 in at least eight states, plus the District of Columbia.
It was a good day for IPOs. Payment processor Vantiv Inc. soared 14.7 percent in its first day of trading on the New York Stock Exchange, while email marketer ExactTarget Inc. rocketed up 32 percent on its first day of trading.
In other corporate news:
— Watson Pharmaceuticals Inc. jumped 3.8 percent on reports the generic drugmaker is in talks to buy European counterpart Actavis for about $7 billion.
— Discover Financial Services stock rose 2.7 percent, a day after it reported a 36 percent jump in its first-quarter profit. Customers used its credit card more and racked up higher balances but also improved their payment habits.
— Diamond Foods Inc. declined 7.2 percent after the maker of Emerald nuts and other snacks said it is suspending dividend payments to stockholders because of a new credit agreement.