US stock indexes on Tuesday suffered their steepest drop since markets reopened following September 11 2001, as global investors fled risky assets after the biggest fall in Chinese shares for a decade.

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The Dow Jones Industrial Average was down by more than 500 points at one point on Tuesday afternoon as worries about the US subprime mortgage market and a warning from Alan Greenspan, former chairman of the Federal Reserve, about a possible US recession punctured recent market optimism.