By Agence France-Presse
Shanghai and Hong Kong led losses after Donald Trump's Trade Representative Robert Lighthizer confirmed earlier reports that the White House was considering hiking levies to 25 percent from the announced 10 percent on $200 billion of Chinese goods.
"We have been very clear about the specific changes China should undertake. Regrettably, instead of changing its harmful behaviour, China has illegally retaliated against US workers, farmers, ranchers and businesses," Lighthizer said.
His statement comes after separate reports said the two sides were looking to restart talks to avert a trade war between the world's top two economies that could hammer global growth.
In response to earlier reports that the US was considering the move, Chinese foreign ministry spokesman Geng Shuang warned Wednesday that "blackmail and pressure from the US side will never work on China".
The latest developments come as Washington considers imposing tariffs on $16 billion of goods in the coming weeks, having already targeted imports worth $34 billion last month.
Investors are left guessing about how the crisis will play out, with some worrying that with both sides digging in there could be more pain down the line, but others saying Trump is playing tough as a negotiating tactic.
"Markets are now wary of the next step in the trade war between the US and China," Nick Twidale, chief operating officer at Rakuten Securities Australia, said in a note.
"With the US threatening to increase tariffs to 25 percent from 10 percent and the Chinese vowing not to react to 'blackmail' to get them back to the negotiating table, this could be the catalyst that tips sentiment and some markets into a tailspin to the downside, especially as we enter the lower liquidity holiday trading season."
Shanghai finished down two percent and Hong Kong lost more than two percent in the afternoon, while Seoul slipped 1.6 percent.
Tokyo lost one percent and Sydney eased 0.6 percent. Taipei shed 1.5 percent while Singapore was also more than one percent off.
In early trade London shed 0.3 percent, Paris eased 0.4 percent and Frankfurt sank 0.9 percent.
On currency markets, the pound was virtually unchanged against the dollar ahead of a Bank of England policy meeting at which it is expected to lift interest rates to their highest level for nine years as it looks to fend off rising inflation.
But the dollar weakened against the yen despite the Federal Reserve on Wednesday indicating it would hike borrowing costs next month, with the Japanese unit supported by the central bank's lighter touch to monetary policy.
Oil prices rebounded slightly after falling sharply Wednesday in response to a jump in US crude stockpiles and reports that output by OPEC and Russia increased in July.
Key figures at 0720 GMT
Tokyo - Nikkei 225: DOWN 1.0 percent at 22,512.53 (close)
Hong Kong - Hang Seng: DOWN 2.3 percent at 27,701.89
Shanghai - Composite: DOWN 2.0 percent at 2,768.02 (close)
London - FTSE 100: DOWN 0.3 percent at 7,631.42
Euro/dollar: UP at $1.1661 from $1.1659 at 2030 GMT
Pound/dollar: DOWN at $1.3084 from $1.3124
Dollar/yen: DOWN at 111.66 yen from 111.86 yen
Oil - West Texas Intermediate: UP 18 cents at $67.84 per barrel
Oil - Brent Crude: UP 43 cents at $72.82 per barrel
New York - Dow Jones: DOWN 0.3 percent at 25,333.82 (close)