US President Donald Trump, incensed by a surge of illegal immigrants across the southern border, vowed on Thursday to impose a tariff on all goods coming from Mexico starting at five percent and ratcheting higher until the flow of border-crossers ceases.

Trump's move was a dramatic escalation of his battle to control a tide of illegal immigrants that has increased despite his efforts to build a border wall and take other steps.

Trump said in a statement the tariffs would start at five percent on June 10 and increase monthly until it reaches 25 percent on Oct 1, unless Mexico takes steps to halt the thousands of people crossing from Central America through Mexico to the US border.

"If the illegal migration crisis is alleviated through effective actions taken by Mexico, to be determined in our sole discretion and judgment, the tariffs will be removed," Trump said.

The announcement rattled investors who feared that worsening trade frictions could hurt the global economy. The Mexican peso, US stock index futures and Asian stock markets tumbled on the news, including the shares of Japanese automakers who ship cars from Mexico to the United States.

US officials said 80,000 people are being held in custody with an average of 4,500 arriving daily, overwhelming the ability of border patrol officials to handle them.

A senior White House official said Trump was particularly concerned that US border agents apprehended a group of 1,036 migrants as they illegally crossed the border from Mexico on Wednesday. 

Officials said it was the largest single group since last October.

Potential for chaos

The president's move was a direct challenge to the Mexican government of President Andres Manuel Lopez Obrador and raised the risk of deteriorating economic relations between two neighbours heavily dependent on the cross-border flow of goods.

Trump’s directive also spelt the potential for chaos for his efforts to get the US Congress to approve his USMCA trade deal, which he sees as a replacement to the North American Free Trade Agreement between the United States, Mexico and Canada.

"We're in a good moment building a good relationship (with the United States) and this comes like a cold shower," said Mexico's deputy foreign minister for North America Jesus Seade.

He said it would be disastrous if Trump goes through with his threat to impose the tariffs. Calling Trump's move "extreme", Seade said a normal response would be for Mexico to "mirror" the US tariffs but that would lead to a trade war.

Trump said he was acting under the powers granted to him by the International Emergency Economic Powers Act. He campaigned for election in 2016 on a vow to crack down on illegal immigration and has been frustrated that the flow has increased in recent months.

"Mexico’s passive cooperation in allowing this mass incursion constitutes an emergency and extraordinary threat to the national security and economy of the United States," Trump said in the statement.

"Mexico has very strong immigration laws and could easily halt the illegal flow of migrants, including by returning them to their home countries," he said.

White House acting chief of staff Mick Mulvaney, asked in a conference call with reporters which products from Mexico could be affected by the tariffs, said: "All of them."

“This is an urgent problem," Mulvaney said. "We are interested in seeing the Mexican government act tonight, tomorrow.”

Shares in Toyota Motor Corp, Nissan Motor Co and Honda Motor Co all fell around three percent or more, while Mazda Motor Co fell nearly seven percent. All four automakers operate vehicle assembly plants in Mexico.

"The threat of US tariffs on Mexico to take effect inside two weeks is a sharp blow to investor sentiment," said Sean Callow, a senior currency analyst at Westpac. 

"Mexico is the US's largest trading partner and a flare-up in trade tensions was definitely not on the market radar."

Investors scooped up safe assets, driving the yield on the 10-year US Treasury note to 2.18 percent, the lowest since September 2017 even as the dollar surged against the Mexican peso

- Reuters