Caixin´s Purchasing Managers´ Index (PMI) -- an independent survey of manufacturing activity -- came in at 48.2 for July, the weakest reading since 48.1 in April 2014.
On Monday, the government said that profits of major industrial firms slipped 0.3 percent year-on-year in June to 588.57 billion yuan.
Securities firms lost ground in Shanghai. Industrial Securities plunged by its 10 percent daily limit to 10.38 yuan and Dongxing Securities also slumped 10 percent to 21.92 yuan.
Toll road-related shares also fell. In Shanghai, Hubei Chutian Expressway dropped by its 10 percent daily limit to 6.26 yuan and Shandong Hi-speed lost 10 percent to 7.49 yuan.
Despite official denials, investors are also worried over whether the government will exit the market by removing the support funds which have propped up prices.
"The rise during the past two to three weeks was too big, so the market needs to correct itself," Zhang Qi, an analyst from Haitong Securities, told AFP.
"And there is also uncertainty about how the government support measures will exit the market," he said. Nonetheless he expects the Shanghai index to continue to move around the 4,000-point level.
China´s securities regulator last week denied studying an exit plan for market-stabilisation funds.
The state-backed China Securities Finance Corp., tasked with restoring market stability, also denied reducing its holdings in listed companies, state media reported on Wednesday.
But despite Monday´s dramatic decline, economists saw little reason for worry.
"Today´s market movement is not surprising," ANZ´s Liu Li-Gang and Raymond Yeung wrote in a report, saying further volatility is likely as regulators continue to implement control measures.
"However, we do not regard the price movement in (the) equity market a financial crisis," they said, adding they expect the central People´s Bank of China to carry out another interest rate cut -- after doing so four times already since November -- as well as further loosening bank reserve requirements to support the broader economy.