* Wall Street slides on equity sell-off in China
* 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 close of European markets; updates U.S. markets)
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 crude prices down more than 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 Japan, which sparked hopes that new policies will help support consumer spending and fuel the economy. [ID:nN31441465]
The Shanghai Composite Index .SSEC> fell 6.7 percent to a three-month closing low, adding to August losses that marked the second-biggest monthly loss in 15 years on worries that corporate earnings do not 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."
At 1 p.m., the Dow Jones industrial average <.DJI> was down 87.97 points, or 0.92 percent, at 9,456.23. The Standard & Poor's 500 Index <.SPX> was down 12.44 points, or 1.21 percent, at 1,016.49. The Nasdaq Composite Index <.IXIC> was down 27.12 points, or 1.34 percent, at 2,001.65.
The drop in crude prices hurt oil stocks, with the S&P
Energy index <.GSPE> sliding 2.2 percent. Exxon Mobil
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 4.4 percent to $5.00, and AIG
Shares in Europe also fell. The FTSEurofirst 300 .FTEU3> index of top regional shares slid 0.7 percent to close at 972.02 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 $3.18 to $69.56 a barrel. London Brent crude LCOc1> lost $3.59 to $69.20.
In currency markets, the yen gained on 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 133.11 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 $1.4367 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, U.S. government bonds edged higher in thin trade, helped by global equity losses. However, price moves were held in check as investors awaited a huge slate of data this week. [ID:nN31320531]
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 9/32 in price, yielding 3.42 percent.
Benchmark euro zone government bonds slipped, with strong technical support mostly absorbing a wave of selling on the back of the unexpectedly strong rebound in U.S. regional business activity. [ID:nLV325985]
U.S. gold futures fell below $950 an ounce on investors' risk aversion, before paring some losses. ID:nN31358268
December gold GCZ9> was down $6.20 to $952.6 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 1.2 percent. (Reporting by Ryan Vlastelica, Edward McAllister, Wanfeng Zhou, Gertrude Chavez-Dreyfuss, Burton Frierson in New York; Emelia Sithole-Matarise, Brian Gorman and Dominic Lau in London; writing by Herbert Lash; Editing by Leslie Adler)