Also on Thursday, the People's Bank of China surprised markets by setting the official midpoint rate on the currency at 6.5646 yuan per dollar, the weakest in nearly five years, the official Xinhua news agency reported, citing data from the China Foreign Exchange Trading System.
That was 0.5 percent weaker than the day before and the biggest daily drop since last August, when an abrupt near 2 percent devaluation of the currency also roiled markets.
The move sparked speculation that the Chinese authorities are engineering a weaker yuan to support exports, after surveys on economic activities in China published so far this year pointed to further slowing in the economy.
"It's been known that China's economy is not in a good shape. What markets don't like above all is that there is no telling what the Chinese central bank is trying to do on the yuan," said Teppei Ino, currency analyst at Bank of Mitsubishi-Tokyo UFJ in Singapore.
The impact of the double-punch from China was immediate as Japanese stocks fell and regional currencies went into a tailspin. The Japanese yen strengthened sharply and the Australian dollar, often used as a liquid proxy for the yuan, fell to a two-month low, having shed more than three percent since the days since the start of new year.
A sustained depreciation in the yuan puts pressure on other Asian countries to devalue their currencies to stay competitive with China's export machine.
It also makes commodities denominated in U.S. dollars more expensive for Chinese buyers, which could hurt demand and thus further depress commodity prices in a vicious chain reaction.
China's market plunge in may have been exacerbated by investors rushing to sell before they were locked out, some analysts said.
"After today's low opening there was some apparent panic selling with investors trying to reduce exposure before the mandatory triggers," said Gerry Alfonso, trading head at Shenwan Hongyuan Securities in Beijing.
"Sentiment seems to be rather fragile at the moment as the soft macroeconomic environment together with the fear of not being able to sell during a market correction causing some anxiety among investors," he wrote in a note to clients.
Japan's benchmark Nikkei 225 index fell 1.5 percent to 17,920.61 and South Korea's Kospi lost 1 percent to 1,905.51.
Hong Kong's Hang Seng shed 2.4 percent to 20,479.39 and Australia's S&P/ASX 200 retreated 2 percent to 5,020.40.
Benchmarks in Taiwan, New Zealand and Southeast Asia also fell.
European shares fell sharply with the pan-European FTSEurofirst 300 index and the euro zone's blue-chip Euro STOXX index both falling 2 percent. Germany's DAX declined 1.4 percent, while Britain's FTSE 100 weakened by 1.6 percent.
"The extent of the slowdown in China is certainly a worry," said Terry Torrison, managing director at Monaco-based McLaren Securities. "Investor sentiment is very fragile at the moment,"