MSCI's broadest index of Asia-Pacific shares outside Japan fell about 1.4 percent at its lowest level since early September. Japan's Nikkei stock average lost 2.9 percent, extending its declines into a fourth session.

But the greenback's descent took a breather, with the dollar index gaining 0.1 percent to 81.101.

Data showing US manufacturing activity slowed sharply last month dealt a heavy blow to markets already worried that the US Federal Reserve's decision to taper its asset purchases would lead to capital flight from emerging markets.

"Investors should steer clear of risk assets over the short term as the turmoil does not look like it will be over anytime soon," Mitul Kotecha, the Hong Kong-based head of global foreign exchange strategy for Credit Agricole, said in a note to clients.

"A combination of tapering, a confluence of country- specific emerging market concerns and weaker growth in China provide the backdrop for a volatile few weeks if not longer, ahead," Kotecha added.

The yield on benchmark 10-year US Treasury notes stood at 2.587 in Asian trading, after falling as low as 2.582 percent on Monday, the lowest since November 1.

January's sharp fall in US output activity came on the back of the biggest drop in new orders in 33 years, while construction spending barely rose in December, suggesting the US economic recovery is more tenuous than some investors had believed.

The data helped launch the benchmark S&P 500 index on its worst single-day drop in seven months, while the CBOE volatility index soared 16.5 percent to close at its highest level since December 2012.
That helped send the dollar as low as 100.77 yen and the euro as low as 136.37 yen, levels neither pair had touched since late November.

In Asian trading, the dollar took back some lost ground, adding about 0.3 percent to buy 101.24 yen, while the euro rose 0.2 percent on the day to 136.84 yen.

The Australian dollar was slightly lower at USD 0.8738, as investors awaited the Reserve Bank of Australia's policy decision due at 0330 GMT.

All analysts polled by Reuters expected the RBA to keep its 2.5 percent cash rate intact, although some said the central bank might drop its easing bias.

On the commodities front, US oil edged up slightly to USD 96.53 a barrel, after plunging USD 1.09 on Monday as the weaker-than-expected US factory data fanned fears about demand in the world's largest economy.

The stock market selloff added to the safe-haven appeal of gold, with spot gold edging up to USD 1,258.84 an ounce, after gaining 1.1 percent on Monday.


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