* Wall Street slides on China equities and financials
* China's equities fall stirs fears on economic recovery
* Yen hits 7-week high on risk aversion, Japanese election
* Oil drops to under $70 a barrel, eyes weaker equities
* U.S. government debt choppy in stock-data tug-of-war (Updates with U.S. markets activity, changes dateline; previous LONDON)
By Herbert Lash
NEW YORK, Aug 31 (Reuters) - A sharp sell-off in Chinese stocks raised fears about China's ability to lead an economic recovery, dragging down equity prices around the world on Monday and knocking the price of crude oil down by almost 4 percent on demand worries.
Risk aversion helped drive the yen to a seven-week high against the dollar and to rise against other currencies. The yen was also buoyed by a decisive opposition victory in Japanese elections, which sparked hopes that new policies will help support consumer spending and fuel the economy. ID:nN31360676
The Shanghai Composite Index .SSEC> fell 6.7 percent to a three-month closing low, posting its second-biggest monthly loss in 15 years on worries that corporate earnings failed to justify stock valuations. ID:nHKG349309
Selling in Asian markets was widespread, hitting consumer discretionary, energy, telecommunications and materials sectors.
"Investors in the United States felt it was important for China to help lead the path to economic recovery," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville. "If their markets are going to misbehave, it opens the question of whether they are going to see a recovery."
In late morning trade, the Dow Jones industrial average .DJI> was down 75.35 points, or 0.79 percent, at 9,468.85. The Standard & Poor's 500 Index .SPX> was down 9.71 points, or 0.94 percent, at 1,019.22. The Nasdaq Composite Index .IXIC> was down 20.21 points, or 1.00 percent, at 2,008.56.
In New York, shares in natural resource companies fell. Exxon Mobil Corp dropped 0.8 percent to $69.51 while miner Freeport-McMoRan Copper & Gold Inc Inc fell 3.4 percent to $63.24. Caterpillar Inc fell 2.6 percent to $45.51.
Financial shares suffered steep losses after Barron's said the stock of American International Group Inc was overpriced and recommended investors take profits in Citigroup Inc. Shares of Citigroup dropped 3 percent to $5.07, and AIG fell 6.5 percent to $47.02. For more, see ID:nN30408356 and ID:nN30412469.
Shares in Europe also fell, with the FTSEurofirst 300 .FTEU3> index of top regional shares falling 0.6 percent to a provisional close of 972.05 points, after setting a 10-month high on Friday.
Markets in London were closed for the British bank holiday.
Oil CLc1> fell to under $70 a barrel ID:nSYD487149
"It's negative sentiment given the very weak Chinese market," said Eugen Weinberg, analyst at Commerzbank. "This is definitely bad news for the commodities sector, especially oil and metals."
U.S. crude for October CLc1> fell $2.81 to $69.93 a barrel. London Brent crude LCOc1> lost $3.09 to $69.70.
In currency markets, the yen gained on the rising risk aversion.
In mid-day New York trading, the dollar was down 0.7 percent at 92.79 yen JPY=>, having earlier hit a low of 92.53 yen, according to Reuters data, its weakest level since mid-July. The euro lost 0.5 percent to 133.08 yen EURJPY=R.
But the dollar lost its safe-haven bid, giving up gains versus the euro after data showed business activity in the U.S. Midwest picked up at a faster pace than expected in August. The Institute for Supply Management-Chicago business barometer rose to 50.0 from 43.4 in July. ID:nN28382729
The euro rose as high as $1.4366 and was last up 0.2 percent at $1.4344 EUR=>.
"The Chicago PMI report is further indication that the U.S. economy is starting to improve," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "Overall, the data eased risk aversion a little bit, with positive data negative for the dollar and yen."
In the Treasuries market, the upbeat U.S. data held in check the safe-haven bid stoked by the slide in Chinese equities, with prices of U.S. government bonds little changed.
The benchmark 10-year note US10YT=RR was in and out of positive and negative territory during the early part of the session.
It was last up 5/32 in price, yielding 3.43 percent versus Friday's close of 3.45 percent.
Earlier price gains, however, had pushed yields down to 3.40 percent, their lowest since Aug. 21.
Euro zone government bond prices advanced as European shares slipped after the fall in Chinese equities. Activity was subdued with UK markets shut for the holiday. ID:nLV178267
U.S. gold futures fell below $950 an ounce on investors' risk aversion. ID:nN31358268
December gold GCZ9> was down $7.80 to $951 an ounce in New York.
Tokyo's Nikkei share average .N225> fell 0.4 percent and the MSCI index of Asia Pacific stocks traded outside Japan .MIAPJ0000PUS slid 1.3 percent. (Reporting by Edward Krudy, Wanfeng Zhou, Gertrude Chavez-Dreyfuss and Burton Frierson in New York; Emelia Sithole-Matarise, Alex Lawler and Dominic Lau in London; writing by Herbert Lash; Editing by Leslie Adler)