At the open on Tuesday, Shanghai stocks initially plunged more than 3 percent in what dealers described as panic selling. However, the index stabilized by the end of the day, with the benchmark Shanghai Composite Index ending down by only 0.26 percent at 3,287.71.

Global stocks started the new year on a grim note as poor manufacturing reports from China and the US triggered fears about waning growth around the world. The events in China heightened worries about the health of the world's second-largest economy. A new "circuit breaker" mechanism aimed at curbing sharp swings had gone into effect after Monday's fall of almost 7 percent, forcing markets to close early that day.

In Tokyo, shares crisscrossed through gains and losses but the day closed with the Nikkei closing down 0.42 percent, or 76.98 points, at 18,374.00 on the back of a stronger yen. Traders remained wary over lingering worries about the global economy following the previous day's rout across world markets.

"Traders are not seeing clarity on the direction of growth. As we are all too familiar with, uncertainty is quite bad for the financial markets," said Bernard Aw, market strategist at IG in Singapore.

Markets in suspense

South Korea's Kospi was up 0.6 percent to 1,930.37 while Hong Kong's Hang Seng lost 0.7 percent to 21,188.72. Stocks in Southeast Asia were mixed.

"Economic indicators in both China and the US are weak. As they're the world's two biggest economies and the impact is huge, each new data point is keeping stock markets in suspense," Toshihiko Matsuno, chief strategist at SMBC Friend Securities, told Bloomberg News.

Adding to investors' concerns were the tensions in the Middle East. Saudi Arabia severed diplomatic relations over the weekend in a dispute over the Saudis' execution of a Shiite cleric. Concerns about a potential threat to world oil supply pushed up prices of oil.

Wall Street finished lower on Monday. The Dow Jones industrial average dropped 1.6 percent lower to 17,148.94. The Standard & Poor's 500 lost 1.5 percent to 2,012.66. The Nasdaq composite fell 2.1percent to 4,903.09.

av, ss/se (AP, AFP, dpa, Reuters)