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A trader works at his desk on the floor of the New York Stock Exchange (NYSE) in New York City. TIMOTHY A. CLARY/AFP via Getty Images

U.S. tech stocks tumbled in Monday's trading over surprise advances made by DeepSeek, a small Chinese technology firm and its possible impact on established artificial intelligence-related companies.

The tech-heavy Nasdaq stock market closed down more than 3% and the S&P 500 slipped 1.46% Monday as U.S.-owned tech stocks retreated in anticipation of a more competitive-than-expected AI race ahead.

The Nasdaq fell 612.47 points (-3.07%) to 19,341.83, while the S&P 500 dipped 88.96 points (-1.46%) to 6,012.28. The Dow Jones Industrial Average avoided the downturn, gaining 289.33 points (0.65%) to close at 44,713.58.

Nvidia, which has become one of the largest-valued companies due to its AI chips, dropped 16.9%, nearly $600 billion -- the largest single-day drop in U.S. history. Tech companies Micron, Arm Holdings and Broadcom also saw double-digit percentage drops in Monday's session.

Investors reacted to DeepSeek's newest AI model being cost-effective while running on less advanced chips. DeepSeek reportedly spend just $5.6 million on computing power for its base model, well below its more established AI rivals.

DeepSeek's AI Assistant offering had grown to be the top free download in the Apple App Store, leapfrogging ChatGPT. The new model is expected to be competitive with OpenAI and Meta.

"Chinese tech companies, including new entrants like DeepSeek, are trading at significant discounts due to geopolitical concerns and weaker global demand," Charu Chanana, Saxo's chief investment strategist, told CNN. "DeepSeek's rise could spark renewed investor interest in undervalued Chinese AI companies, providing an alternative growth story."

DeepSeek's strong session also came with a drawback - a cyberattack that forced the upstart to temporarily limit new user registration, although those who have already signed up are still able to log in.

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