GLOBAL MARKETS-Tech tailspin on China's AI drive hits Wall Street

Updates to midday U.S. trading

By Lawrence Delevingne and Samuel Indyk

BOSTON/LONDON, Jan 27 (Reuters) - U.S. technology shares dropped sharply on Monday as surging interest in Chinese startup DeepSeek's low-cost artificial intelligence model raised doubts about the sector's lofty valuations.

The tumble in global equities prompted a widespread flight to safety, with U.S. government bonds rising and safe-haven currencies - the yen and Swiss franc - surging.

DeepSeek, which overtook rival ChatGPT to become the top-rated free application on Apple's App Store in the U.S., says it uses lower-cost chips and less data, challenging a widespread bet in markets that AI will drive demand along a supply chain from chipmakers to data centers.

On Wall Street , the Dow Jones Industrial Average .DJI fell 0.15%, to 44,358, the S&P 500 .SPX dropped 1.8%, to 5,991 and the Nasdaq Composite .IXIC slumped about 3%, to 19,360.

Nvidia , whose chips are the top choice for powering AI applications, dropped about 15% on the day in line with industry peers Broadcom and Marvell Technology .

The CBOE Volatility Index .VIX, known as Wall Street's "fear gauge", hit its highest level since Dec. 20, surging 25% on the day.

"The catalyst of a foreign competitor to U.S.-led AI dominance begs other questions about trade and semiconductor chips and energy needs," Robert Savage, head of markets strategy and insights at BNY, wrote in a note. "The markets are unsettled, and volatility is higher after last week's strong returns."

In Europe, the pan-European STOXX 600 index .STOXX was little changed, but the STOXX Europe 600 technology index .SX8P fell 3%, its biggest one-day drop since mid-October. MSCI's gauge of stocks across the globe .MIWD00000PUS fell 1.25%.

BROAD RISK-OFF MOOD

U.S. Treasury yields tumbled to multi-week lows on Monday, tracking steep declines in equities, as investors sought the safety of government bonds. The benchmark U.S. 10-year yield US10YT=RR dropped 7.7 basis points (bps) to 4.546%.

That pushed the dollar lower, with safe-haven currencies as the main beneficiaries.

"Haven demand has spilled over into FX," said Shaun Osborne, chief FX strategist at Scotiabank.

"Part of the dollar's slippage can be accounted for by the sharp fall in bond yields," Osborne added.

The dollar fell 1.1% against the yen JPY=EBS and 0.6% against the Swiss franc CHF=EBS, two currencies that often gain during periods of market unease.

The dollar index =USD, which measures the U.S. currency against six peers, fell 0.4% to its lowest level since Dec. 18.

U.S. import tariffs remain a key theme in markets, with President Donald Trump so far refraining from implementing broad trade levies.

China, Mexico and Canada are still facing a nervy wait after Trump last week earmarked Feb. 1 for additional tariffs on top trading partners.

The U.S. dollar rose around 1.7% against the Mexican peso MXN= but was little changed against its Canadian counterpart CAD=D3 and the Chinese yuan in offshore trading CNH=D3.

The dollar also rose 1.26% against the Colombian peso COP= after a short-lived spat over deportations.

On Sunday, Trump threatened Colombia with tariffs and sanctions to punish it for refusing to accept military flights carrying deportees, but Colombia later said it would accept repatriation flights and the U.S. sanctions threat was put on hold.

The market volatility on Monday kicks off a busy week in which both the U.S. Federal Reserve and the European Central Bank meet to set interest rates.

Oil prices edged lower on Monday as the deal with Colombia reduced immediate concern over oil supply disruptions, though Trump's muscle-flexing is keeping markets twitchy.

U.S. crude CLc1 fell 1.81% to $73.31 a barrel and Brent LCOc1 dropped to $77.21 per barrel, down 1.64% on the day.

Gold XAU= fell 1.14% to $2,739 per ounce.

Leading cryptocurrency bitcoin BTC= slumped more than 3.9%, dropping below $100,000 for the first time in a week, before bouncing to trade at $100,974.