The indexes gave up early gains after the manufacturing activity index showed a reading of 47.8, according to the ISM report, falling further from August's sharp contraction and below economists' expectations of 50.1. A reading below 50 indicates contraction.
Investors moved to the safety of US Treasuries following the data that came close on the heels of a contraction in euro zone manufacturing earlier in the day.
The industrials sector slipped 1.71%, the most among the 11 major S&P sectors. Four other sectors dropped more than 1%.
"The PMIs across the globe have continued to deteriorate and obviously we are in line with that deterioration. It's all due to the trade war," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.
Despite a prolonged US-China trade war that has hammered global growth, confidence in the domestic economy has been one of the factors that has helped the benchmark S&P 500 climb about 18% so far this year.
At 12:28 pm ET, the Dow Jones Industrial Average was down 268.11 points, or 1.00%, at 26,648.72 and the S&P 500 was down 26.31 points, or 0.88%, at 2,950.43.
The Nasdaq Composite was down 58.50 points, or 0.73%, at 7,940.84.
Shares of online brokerage E*Trade Financial tumbled 16%, the most on the S&P 500, following rival Charles Schwab Corp's move to remove commissions for online trading of stocks, ETFs and options listed on US or Canadian exchanges.
Charles Schwab's shares fell 8.9%.
McDonald's Corp dropped 2.7% after J.P Morgan said the fast food chain's third-quarter same-store sales would be softer than analysts' estimates.