Trading volume slipped slightly to $12.15 billion from $12.9 billion on Monday.

The Hang Seng Index finished down 0.55 per cent, or 71.1 points, at 12,950.80, after trading in a narrow 83-point range during the entire session.

Francis Lun, general manager at Fulbright Securities, said rising oil prices triggered fears of higher inflation and more aggressive interest-rate rises, which kept most property stocks under pressure throughout the day.

Cheung Kong (Holdings) fell 1.13 per cent to $65.50, Sun Hung Kai Properties dropped 0.68 per cent to $72.50 and Henderson Land Development shed 0.54 per cent to $36.90. Wharf Holdings and its parent Wheelock & Co bucked the trend, however, thanks to high demand for the new Bellagio residential project, adding 0.58 per cent and 0.45 per cent respectively.

Exporters were also at the forefront of the decline amid concern that an economic slowdown would strangle consumer demand. PC maker Lenovo Group fell 2.83 per cent to $2.575, athletic shoe maker Yue Yuen dropped 2.45 per cent to $19.90 and sourcing firm Li & Fung fell 1.74 per cent to $11.30.

Car stocks took a double hit with soaring fuel costs seen as an additional drag on demand. Denway Motors was the worst-performing blue chip with a 4.63 per cent drop to $2.575 and fellow mainland car maker Brilliance China fell 1.29 per cent.

Cathay Pacific recorded its 11th straight day of flat or lower share prices with a 1.5 per cent drop to $13.10. The decline has come as oil prices have edged higher in the past nine sessions, culminating in yesterday's rise above US$50 for the Nymex sweet crude oil futures during Asian trading hours.

UBS lowered its recommendations for local airlines, cutting Cathay and China Southern Airlines to 'neutral' from 'buy' and slashing China Eastern Airlines to 'reduce' from 'neutral'.

China Southern fell 1.79 per cent to $2.75 and China Eastern dropped 0.63 per cent to $1.58.

The H-share index held up better than the broader market thanks to gains by the large oil producers, falling only 0.17 per cent, or 7.60 points, to 4543.72.

PetroChina rose 1.86 per cent to $4.10, while China Petroleum and Chemical Corp (Sinopec) was up 1.63 per cent at $3.125. China Oilfield Services - which provides drilling, well and transport services to the oil producers - jumped 6.98 per cent to $2.30.

Looking ahead, market observers were divided on whether yesterday's setback was an extension of a consolidation which has now lasted for about a week, or the beginning of a reversal of the upward trend that had been in place since the middle of last month.

'Hong Kong is clearly on an uptrend,' said DBS Vickers sales director Peter Lai.

'Every time there is extensive selling, we see strong buying from overseas funds.'

He cited the support from China, including the closer economic partnership arrangement and the individual travel scheme, as well as upcoming initial public offerings as issues that are attracting fund flows to Hong Kong, and argued that the HSI index should see strong support at its 50-day moving average around 12,700.

Andrew To, sales director with Tai Fook Securities, disagrees.

'The market has already hit its peak and the momentum is very poor at the moment,' he said. 'There is no inflow of new money and the recent rally was sparked by a squeeze in short positions.'

Mr To said he suspected the local market was holding up because of hopes for a positive impact from China's week-long National Day holiday which starts on Friday, but projected the HSI would fall to 12,500 before seeing major support.