By Caroline Valetkevitch

NEW YORK (Reuters) -U.S. stocks ended down sharply Monday, with the S&P 500 posting its biggest daily percentage drop since December 18 after U.S. President Donald Trump said 25% tariffs on Canada and Mexico will go into effect on Tuesday, while the euro strengthened after European leaders agreed to draw up a Ukraine peace plan.

U.S. indexes hit session lows after the tariff comments. The Canadian dollar and Mexican peso both hit one-month lows after the tariff news.

Trump said there was "no room left" for a deal that would avert the tariffs on Canada and Mexico. He also said reciprocal tariffs will start April 2.

"It seems that tariffs are definitely going to go through and it increases the chances of a real economic fallout. The markets are not psyched to stick around for that," said Thomas Martin, senior portfolio manager at Globalt Investments in Atlanta.

"To say ‘no room’ for negotiation is a hard line, a definitive statement."

Shares of U.S. automakers declined, with General Motors down 3.6%.

U.S. economic data on Monday also weighed on stocks. It showed manufacturing was steady in February, but a measure of prices at the factory gate jumped to a nearly three-year high and materials deliveries were taking longer, suggesting that tariffs on imports could soon hamper production.

The Dow Jones Industrial Average fell 649.67 points, or 1.48%, to 43,191.24, the S&P 500 fell 104.78 points, or 1.76%, to 5,849.72 and the Nasdaq Composite fell 497.09 points, or 2.64%, to 18,350.19.

MSCI's gauge of stocks across the globe fell 7.14 points, or 0.83%, to 855.81. The pan-European STOXX 600 index ended up 1.07%, with shares of European arms makers surging.

The euro was up 1.07% at $1.0486, while the dollar index, which measures the greenback against a basket of currencies, fell 0.72% to 106.54.

European leaders agreed at the weekend to draft a peace plan to present to the United States, following Ukrainian President Volodymyr Zelenskiy's clash with Trump in the Oval Office.

"That's certainly a positive for Europe because it's unifying more of western Europe including Ukraine and drawing a line for the Russians, who have been very transparent that they want to recreate the old Soviet Union," said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York.

Reuters reported that parties in talks to form Germany's new government are considering setting up a defense fund.

Bitcoin was lower after surging over the weekend, when Trump raised the possibility of a new U.S. strategic reserve that would include a range of tokens.   

Trump posted on Sunday on Truth Social that his January executive order on digital assets would create a stockpile of currencies, including bitcoin, ether, XRP, solana and cardano.

Trump provided no detail on how the fund would work, but it was enough to revitalize the crypto bulls, who had taken a serious knock last week.

"Trump just gave the pump that crypto traders have been holding out for," said Matt Simpson, senior market analyst at City Index.

Bitcoin was down 8% from Sunday.

Longer-dated U.S. Treasury yields fell after the latest reading on the manufacturing sector.

The yield on benchmark U.S. 10-year notes fell 7 basis points to 4.159%, from 4.229% late on Friday.

Also key this week will be the January U.S. payrolls report, due on Friday.

A recent spate of softer economic data has nudged up expectations the Federal Reserve may be more active in lowering interest rates.

Markets are pricing in 67 bps of cuts by the Fed this year, after earlier views saw the Fed reducing rates by less than 50 basis points.

The European Central Bank is widely expected to cut rates when it meets on Thursday, although there is less conviction over what it might signal about the monetary policy outlook, given geopolitical factors.

Oil prices fell about 2% to a 12-week low on reports OPEC+ will move forward with a planned oil output increase in April and amid concern that U.S. tariffs could hurt global growth.

Brent futures fell $1.19, or 1.6%, to settle at $71.62 a barrel, while U.S. West Texas Intermediate (WTI) crude fell $1.39, or 2.0%, to settle at $68.37.

Spot gold gained 1.1% to $2,890.57 an ounce.

(Additional reporting by Amanda Cooper in London and Carolina Mandl in New York; Editing by Edwina Gibbs, Emelia Sithole-Matarise, Susan Fenton, Richard Chang and Nia Williams)