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He said markets have misunderstood the president's plans.

The fireworks in the stock market follow an escalation in the back-and-forth threats to global trade, which suggest that investors are becoming increasingly anxious that political rhetoric is moving toward actual policy.

Tariffs on $34 billion worth of Chinese goods, the first of a potential total of $450 billion, are due to take effect on July 6 over USA complaints that China is misappropriating U.S. technology through joint venture rules and other policies.

Most economists warn that tariffs, including ones the United States has imposed on foreign steel and aluminium, are disrupting supply chains and risk discouraging investment and hiring.

China and the European Union on Monday rejected unilateral and protectionist actions in worldwide trade, in a clear reference to US President Donald Trump's measures against Beijing and Brussels.

The recent imposition of import tariffs by the US, and counter-measures by other countries, are also starting to affect global production and supply chains. Katainen urged China to tackle overcapacity in its steel, aluminum, and other sectors including technology, the European Union said in a statement.

The pan-European FTSEurofirst 300 index .FTEU3 lost 2.19 percent and MSCI's gauge of stocks across the globe.MIWD00000PUS shed 1.41 percent.

US and Canadian stocks suffered their worst one-day decline in several months on Monday, amid rising global trade tensions and their potential impact on the world economy.

But trade policy advisor Navarro, the administration's harshest China critic, has advocated a far more confrontational approach with Beijing. "The rhetoric is getting stronger rather than weaker". "It's bad for growth", he said.

The report, citing eight sources familiar with the plan, said such a move would put "Washington's trade war with Beijing on a potentially irreversible course".

Foreign investments already must pass interagency review under the Committee on Foreign Investment in the USA, to see if they violate national security.

Meanwhile, later this week, the Treasury Department is due to unveil a proposal on investment and export restrictions.

The government official said the Treasury would invoke the International Emergency Economic Powers Act of 1977 (IEEPA) to devise the restrictions.

Hours later, White House trade and manufacturing adviser Peter Navarro walked back Mnuchin's remarks, telling CNBC that the restrictions on investing in tech companies would just target China.

By mid-afternoon, the S&P 500 was down 1.83%, and the Nasdaq had fallen 2.33%.

Policymakers in China moved quickly to temper any potential economic drag from Beijing's dispute with the United States.