In Asia, MSCI's ex-Japan Asia-Pacific shares index dropped 0.32%, with Australian shares falling more than 1%. Japan's Nikkei slid 0.50%.
Adding to tensions in Asia, North Korea carried out at least one more projectile launch on Wednesday, a day after it announced it will hold working-level talks with the United States at the weekend.
On Wall Street, the S&P 500 lost 1.23% to hit four-week lows.
Selling was triggered after the Institute for Supply Management's (ISM) index of factory activity, one of the most closely-watched data on U.S. manufacturing, dropped 1.3 points to 47.8, the lowest level since June 2009.
A reading below 50 indicates contraction in the manufacturing sector. Markets had been expecting the index to rise back above 50.
The data came after euro zone manufacturing data showed the sharpest contraction in almost seven years.
"In terms of the outlook on the manufacturing, U.S-China trade talks planned next week is everything. If that goes well, we could well see a V-shaped recovery in the ISM data in coming months," Hirokazu Kabeya, chief global strategist at Daiwa Securities.
"That means we can't just bet on a further decline in the U.S. economy now. On the whole I don't think we need to change our view that the U.S. economy remains relatively solid," he added.
The poor data lifted the Fed funds rate futures price sharply, with the November contract FFX9 now pricing in about an 80% chance the U.S. Federal Reserve will cut interest rates this month, compared to just over 50% before the data.
The U.S. 10-year Treasuries yield fell to 1.637 percent, reversing earlier gains sparked by a jump in Japanese government bond yields and hitting the lowest level since early September.
Gold rose back to $1,479.80 per ounce from a two-month low of $1,459.50 hit on Tuesday on the back of a robust U.S. dollar.
In the currency market, the U.S. dollar slipped from Tuesday's two-year high against a basket of currencies as the ISM survey has shaken the notion that the U.S. economy will withstand the escalating trade war.
The yen rose to 107.75 yen per dollar, from Tuesday's low of 108.47.
The euro stood at $1.0932, having bounced off a near 2 1/2-year low of $1.0879 hit in European trade.
The Australian dollar fetched $0.6705, having hit a 10 1/2-year low of $0.6672 the previous day after the Reserve Bank of Australia cut interest rates and expressed concern about job growth.
The weak U.S. data pushed oil prices to near one-month lows, although reports of a third-quarter decline in output from the world's largest oil producers kept oil from falling further.
U.S. crude stocks fell last week, data from industry group the American Petroleum Institute showed on Tuesday, helping to lift oil prices in Asia.
Brent crude futures rose 0.63% to $59.26 a barrel, after hitting a four-week low of $58.41 on Tuesday, while U.S. West Texas Intermediate (WTI) crude gained 0.78% to $54.04 per barrel after hitting one-month low of $53.05.
(Reporting by Hideyuki Sano; editing by Richard Pullin) ((email@example.com; +81 3 4563 2768;))