Asian shares faltered on Tuesday and the dollar hovered near two-week lows as prospects for a Sino-U.S. trade deal was dealt a blow after the United States charged Chinese telecom firm Huawei with bank fraud and for conspiring to steal trade secrets.
MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.5 percent with Australia's benchmark index down 0.7 percent and South Korea's KOSPI off 0.6 percent.
Japan's Nikkei slid over 1 percent. U.S. stock futures also lost ground following from a torrid overnight session on Wall Street, with E-Minis for the S&P 500 down 0.5 percent.
Investors were nervously awaiting a fresh round of U.S.-China trade talks with Chinese Vice Premier Liu He meeting U.S. officials on Wednesday and Thursday.
Prospects for a deal between the economic giants will be tested as the U.S. Justice Department unsealed indictments against China's top telecom equipment maker, Huawei, accusing it of bank and wire fraud to evade Iran sanctions and conspiring to steal trade secrets from T-Mobile US Inc.
Souring U.S.-China relations roiled global markets for much of last year, and have now started to hurt world growth, one reason the U.S. Federal Reserve has signalled it will be patient on policy after raising rates four times in 2018.
Overnight, markets got a reminder of the potentially damaging economic impact of the Sino-U.S. trade war as Wall Street stocks were hit by profit warnings.
The losses came as shares of Caterpillar and Nvidia Corp nosedived after the two manufacturers joined a growing list of companies cautioning about the crippling effects of softening Chinese demand.
Caterpillar plunged more than 9 percent for its worst single-day drop since August 2011 while chipmaker Nvidia slid 13.8 percent.
"Both companies are seen as industry bellwethers and their disappointing results provide further evidence that this time China's slowdown is for real," said Rodrigo Catril, Sydney-based strategist at National Australia Bank.
The downbeat global growth impulse mean investors will look for further confirmation the Fed will pause its rate-hike cycle at a two-day policy meeting ending Wednesday.
Overnight on Wall Street, the Dow and S&P 500 each closed down 0.8 percent and the Nasdaq was off more than 1 percent.
Worryingly, earnings at China's industrial firms too shrank in December, pointing to more troubles for the country's vast manufacturing sector already struggling with a decline in orders, job layoffs and factory closures.
Slowdown fears slugged the U.S. dollar which faltered to its lowest in two weeks on Monday. The dollar's index, which measures the greenback against a basket of major currencies, was last at 95.766.
Against the safe haven Japanese yen, the dollar was down at 109.16, on track for a third straight session of losses.
Markets will have more catalysts this week with over a 100 of the S&P500 companies reporting results, including Amazon, Apple and Facebook.
Many economists, including the International Monetary Fund, have cut their forecasts for global growth this year citing the U.S.-China trade war.
"Slowdown is feeding into some acute areas of economic unease," U.S. investment bank Citi said in a note, citing recent disappointing factory output data out of Europe and China.
"In some respects, markets seem to have reacted more to recent negative changes in economic data than at other points in recent decades," it added, while noting investors are now pricing in a 1 percent contraction in global earnings per share (EPS) this year.
"This would be the worst year-on-year percentage change in EPS since 2015" even though economic growth is seen much higher this year than in 2015.
Elsewhere, Sterling dithered against the dollar ahead of voting in Britain's parliament on Tuesday that aims to break the Brexit deadlock. It was last at $1.3145
Oil remained on a slippery slope with U.S. crude down 0.17 pct at $51.90 a barrel and Brent easing a shade to $59.90 a barrel.
U.S. gold futures hovered near a seven-month high around $1,303.6 per ounce.
Spot gold was last at 1,303.8 after breaking above a key psychological barrier of $1,300 an ounce on Friday.