Exporters such as fashion retailer Esprit Holdings, which was last year's top performer among the blue chips, and sports-shoe maker Yue Yuen Industrial (Holdings) gave support to the rebound in the wake of strong sales data for last month from retailers in the United States. Esprit finished 2.53 per cent higher and Yue Yuen 1.44 per cent ahead.

Large-caps HSBC Holdings, China Mobile, Cheung Kong (Holdings), Hutchison Whampoa and Sun Hung Kai Properties also recovered from their intraday lows, but were unable to erase all of the morning losses.

The early drop surprised investors who had been expecting that a slight gain on Wall Street and a more stable US dollar would be enough for the Hong Kong market to stage a rebound after having fallen 525.38 points in the previous three sessions.

As it was, buying was still extremely cautious and the Hang Seng Index went no further than 60 points above Thursday's close before it turned around again.

'At about 11am somebody decided to sell a big chunk of [HSI] futures and that sent everybody panicking and heading out the door,' said Andrew Clarke, the head of sales trading at Kim Eng Securities.

Analysts continued to blame the market's setback on the rebound in the US dollar, which has sparked fears of a reversal in the massive inflow of liquidity that has been instrumental in driving stocks higher in the past three months.

China has upset hopes for a near-term revaluation in the yuan and given that US interest rates also look set to be heading higher than initially assumed, US assets are looking more interesting to investors.

As part of this increased appetite for the US dollar, some traders sold Hong Kong dollar forwards, which led to an increase in short-term interest rates.

The three-month Hong Kong interbank offered rate stood at 0.59 per cent yesterday, compared with 0.32 per cent on Monday.

However, there has been no hard evidence of a sizeable outflow from Hong Kong. In fact, the Hong Kong dollar strengthened slightly against its US counterpart yesterday, while the weakening earlier in the week has amounted to no more than 0.3 per cent.

'How much of an outflow we are seeing is still a question mark, but I don't think all the hot money that helped drive the HSI from 12,800 to the high around 14,300 will disappear,' said Linus Yip, a strategist with First Shanghai Securities.

Despite this week's sharp rebound, he noted the US dollar was still well below the 111 yen level and US$1.23 against the euro, where it traded in October last year when the inflows into Hong Kong started.

'I consider the movement in the dollar to be just a technical rebound, and when it stabilises the [Hong Kong] market should be able to resume its uptrend,' he said.

Several Macau-concept stocks took a big hit early in the day after casino magnate Stanley Ho Hung-sun publicly cautioned that many of these stocks are nearing their peaks.

'The frenzied buying in these stocks will not last forever,' Mr Ho said, referring to the past few months of multiplying share prices as investors chased potential winners of an expected Macau gaming and tourism boom.

'A lot of this selling would have been due to margin calls because the market was falling so fast,' said Ben Kwong Man-bun, an associate director with KGI Asia.

Many retail investors have bought Macau stocks with borrowed money - so-called margin financing - and brokers would definitely have been calling for top-up margin on the loans due to the high volatility, he said.

Typically, investors do not have enough cash on hand to meet these calls, but will have to sell part, or all, of their shares to cover them.

Eight of the 28 most traded stocks yesterday were Macau-concept stocks, which accounted for $4.12 billion worth of trading. That corresponded to 12.6 per cent of yesterday's heavy turnover of $32.51 billion.