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The HSBC flash manufacturing purchasing managers' index (PMI), the earliest indicator of China's industrial activity, slumped in November to 48, a low not seen since March 2009.

The data showed the world's growth engine is not immune to economic troubles abroad, and could further unnerve financial markets already roiled by Europe's deteriorating debt crisis.

November's flash reading is a sharp three-point fall from October's final figure of 51 and indicated Chinese factory output shrank on the month in November. A PMI reading of 50 demarcates expansion from contraction.

The last time the PMI slipped below 50 was in September, when the index hit 49.9.

"Industrial production growth is likely to slow further to 11-12 percent year-on-year in coming months as domestic demand cools and external demand is set to weaken," said Qu Hongbin, a HSBC economist.

In line with the dismal headline number, the flash output sub-index tumbled to a 32-month low of 46.7, a steep drop from October's final reading of 51.4.

The marked slowdown in activity cooled factory inflation sharply. The sub-indices for input and output prices sunk around 10 points each to below 50, hugging lows last seen in April 2009.

New export orders were the only bright spot in the survey, holding steady from October to stay above 50.

But the sub-index for new orders suffered its biggest drop in 1- years to sink well below the 50-point mark, suggesting factories received fewer orders on the whole in November even though export orders held up.

Unlike China's official PMI which is published by Beijing and tilts toward large state firms, the HSBC PMI surveys are skewed toward private companies that have been harder hit by China's monetary tightening campaign.

As recent as July, China raised interest rates for the third time this year in a bid to calm rising consumer prices.

STILL A SOFT LANDING?

Weighed by tight domestic monetary conditions and waning demand in its two biggest export markets, Europe and the United States, China's economy lost steam in the third quarter and all signs suggest it would slow further.

Easing activity puts pressure on Beijing to relax monetary policy at the margins by loosening bank lending restrictions, for instance. But until Europe's crisis gets out of hand, few analysts think China is ready to cut interest rates.

Growth in exports hit eight-month lows in October as manufacturing output grew at its weakest in a year. The exuberant Chinese property market is also coming off a boil to drag on real estate construction and investment.

But HSBC's Qu argued China is still headed for a soft-landing as cooling inflation gives Beijing more room to ease policy and support economic growth if needed.

"As inflation is likely to decelerate at a faster-than-expected pace, it will leave more room for Beijing to step up selective easing measures, which should gradually filter through to keep China on track for a soft-landing," he said.

A slackening economy pulled China's inflation to 5.5 percent in October, down from three-year peaks of 6.5 percent struck in July.

The flash PMI is based on up to 90 percent of total responses to the monthly survey and is a snapshot of the final data. HSBC stared publishing the series in February.

(Editing by Jacqueline Wong)

The market remains anchored by concerns about the worsening debt crisis in Europe where rising yields suggest the outlook continues to deteriorate and stocks have been tied to the European credit market's volatility.

News that the International Monetary Fund would make short-term credit available for struggling euro-zone countries gave stocks a temporary boost, but the gains quickly evaporated.

Spain's short-term borrowing costs hit a 14-year high on Tuesday as political uncertainty about a solution to the euro zone's sovereign debt crisis punished another vulnerable southern European country.

The S&P managed to hold near 1,187, seen as the next technical support, representing the 61.8 percent retracement of the 2011 high to low. The index fell below the 1200 mark last week.

Joseph Cusick, senior market analyst at OptionsXpress Holdings Inc in Chicago, said the stock market is currently battered and is reaching a technically oversold level.

"I will be watching the 1,200 level on the S&P. If reached, it would reclaim about 50 percent of the latest two-day pullback, potentially acting as a pivot area for the bulls."

The Dow Jones industrial average .DJI was down 53.59 points, or 0.46 percent, at 11,493.72. The Standard & Poor's 500 Index .SPX was down 4.94 points, or 0.41 percent, at 1,188.04. The Nasdaq Composite Index .IXIC was down 1.86 points, or 0.07 percent, at 2,521.28.

Before Wall Street's opening bell, data showed the U.S. economy grew at a 2 percent annual rate in the third quarter. While down from the government's prior estimate of 2.5 percent one month ago, reduced inventories and solid consumer spending could result in better-than-expected growth in the fourth quarter.

The market showed a muted reaction to minutes from the Federal Reserve's recent policy meeting in which some officials said they were prepared to do more to support the domestic economy. But the committee decided to hold off taking action amid an uncertain outlook.

Hewlett-Packard Co (HPQ.N) dropped 0.8 percent to $26.65 after the computer and printer maker gave a 2012 profit outlook that was below consensus late Monday.

Among Nasdaq stocks, Groupon Inc (GRPN.O) slumped as much as 14 percent on Monday on concern about increased competition, leaving shares of the largest daily deal company at $20.07 compared with their $20 initial public offering price.

In total, about 6.99 billion shares exchanged hands on the New York Stock Exchange, NYSE Amex and Nasdaq, below the current daily average of 8 billion shares.

On the NYSE, decliners beat advancers by 18 to 11, while on the Nasdaq, about two stocks fell for every one that rose.

(Reporting by Angela Moon, Editing by Kenneth Barry)

The Fed said it will publish next year the results of the tests for six banks that have large trading operations: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.

"They are clearly worried about the issue of Europe," said Nancy Bush, a longtime bank analyst and contributing editor at SNL Financial. "In a time of risk aversion and concern, you need transparency."

The Fed said its global market shock test for those banks will be generally based on price and rate movements that occurred in the second half of 2008, and also on "potential sharp market price movements in European sovereign and financial sectors."

In the Fed's hypothetical stress scenario, unemployment would spike as high as 13 percent while U.S. gross domestic product would fall by as much as 8 percent.

The heightened stress tests are part of a larger supervisory test the Fed will conduct on the capital plans of 31 firms with at least $50 billion in assets.

The tests will apply to 19 banks who have previously been through the process and 12 more financial firms considered less complex. The test each bank faces will be based on its size and complexity.

The banks must submit their capital plans to the Fed by January 9, 2012. The Fed said that it plans to respond to banks by March 15. It was not clear when the results would be published.

The Fed will use the stress tests to determine whether banks are robust enough to raise dividends or repurchase stock, or whether they need to obtain additional capital.

The Fed plans to release more information than it did last year about the tests' results. The regulator said it is doing so to "foster market discipline."

The Fed will disclose the estimate of revenues, losses and capital ratios of the 19 biggest banks if they were to suffer a market shock.

This type of disclosure could give investors and markets more certainty about the strength of U.S. banks at a time when there are deep concerns about their European counterparts.

"Eventually, this will be viewed as a positive, and a lot of people will focus on this as a way to verify the viability of these companies," said Matt McCormick, portfolio manager at Bahl & Gaynor investment counsel in Cincinnati.

CONTAGION FEARS

Fitch Ratings earlier this month expressed concern that U.S. banks could take a hit from the debt crisis in Europe.

Analysts at the credit rater said their concerns are based, in part, on U.S. banks having increased trading operations in Europe in the past several years.

"Our concern is with counterparty risk, the impact of Europe on global economic growth and how that weighs on the economic recovery in the U.S.," said analyst Joseph Scott in the November 16 note.

Fears over U.S. firms' European exposure grew after brokerage MF Global filed for bankruptcy on October 31. MF Global collapsed after disclosures about its massive bets on European debt spooked investors and counterparties.

U.S. bank stocks in general have taken a beating over the last year with investors concerned about the sluggish economy, European debt, and the impact of more intense regulation.

The KBW Bank Index of stocks has fallen more than 30 percent this year.

DIVIDENDS

Banks have been eager to boost dividends and buy back stock, but the Fed has indicated it will take a tough stance, particularly if a bank is not far along in meeting new international Basel capital standards.

In a November 9 speech, Fed Governor Daniel Tarullo said the central bank would be "comfortable with proposed capital distributions" only when it is "convinced" a bank is on a path to easily meet the new standards.

"I don't think anyone could say that this is anything but an extremely stringent stress test," said Karen Petrou, managing partner of Federal Financial Analytics. "It will really put the burden on the affected bank holding companies to prove they can make a capital distribution, not on the Fed to block it."

The Fed is putting in place a broad stress testing regime in the wake of the 2007-2009 financial crisis when taxpayers were forced to extend a $700 billion bailout to the financial system.

This will be the second round of Fed tests of banks' capital plans.

Earlier this year, the Fed rejected Bank of America's plan to boost its dividend in the second half of 2011, while allowing other big banks to move ahead with dividend hikes.

Under the 2010 Dodd-Frank financial oversight law, the Fed is required to conduct stress tests on banks with more than $50 billion in assets.

The latest capital tests are separate from this requirement but the Fed said on Tuesday it would try to harmonize the different testing regimes facing banks.

The expansion of the capital tests beyond the 19 who have been scrutinized in the past will likely not be welcomed by those being added to the list.

"It's another layer of Fed oversight on their capital, and they've fought tooth and nail not to be included in this," said Paul Miller, analyst at FBR Capital Markets. "So I don't think any of those banks are particularly happy right now."

(Reporting by Karey Wutkowski, Dave Clarke and Alexandra Alper in Washington, Joe Rauch and Rick Rothacker in Charlotte, and Lauren Tara LaCapra and David Henry in New York; Editing by Bernard Orr and Tim Dobbyn)

The Fed said it will publish next year the results of the tests for six banks with large trading operations: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.

The Fed said its global market shock test for those banks will be generally based on price and rate movements that occurred in the second half of 2008, and also on "potential sharp market price movements in European sovereign and financial sectors."

The heightened stress tests are part of a larger supervisory test the Fed will conduct on the capital plans of 19 firms with at least $50 billion in assets, including those six large banks.

In addition, the Fed will conduct a scaled-back test on the capital plans of 12 more financial firms considered less complex.

The Fed's review of those plans will determine whether the banks are robust enough to raise dividends or repurchase stock, or whether they need to raise additional capital.

The banks must submit their capital plans by January 9, 2012. The Fed said that it plans to respond to banks by March 15.

The Fed is putting in place a broad stress testing regime in the wake of the 2007-2009 financial crisis when taxpayers were forced to extend a $700 billion bailout to the financial system.

This will be the second round of Fed tests of banks' capital plans.

Earlier this year, the Fed rejected Bank of America's plan to boost its dividend in the second half of 2011, while allowing other big banks to move ahead with dividend hikes.

The Fed on Tuesday said it will release the results of the stress test to "foster market discipline."

It said it will disclose the estimate of revenues, losses and capital ratios of the 19 biggest banks if they were to suffer a market shock.

(Reporting by Karey Wutkowski and Dave Clarke, editing by Bernard Orr and Tim Dobbyn)