Analysts warned that the market could still slide if the economic sweetener did not materialise in the near future.

Despite the run-up, Shanghai remains the worst-performing market in the world, having fallen 52.07 per cent this year.

Frank Gong, the chief China economist at JP Morgan, wrote in a research note that Beijing was 'considering an economic stimulus package of at least 200 billion yuan (HK$227.86 billion) to 400 billion yuan' to reinvigorate the economy.

The package would include tax cuts, measures to underpin the capital markets and support for the housing market. Beijing would also ease its monetary tightening to fuel growth by year-end, the report said.

Sources confirmed the accuracy of the report, calling the package a one-of-a-kind incentive to bolster the economy and the stock market.

Vice-Premier Li Keqiang said on Tuesday that robust domestic consumption held the key to sustainable development amid a slowing global economy.

'All eyes are now on the central government because the news of the economic stimulus heightened hopes for a policy positive to the market,' said Kingsun Investment Management analyst Dai Ming.

'But investors shouldn't get carried away if the policy isn't implemented soon because the market is still overshadowed by an influx of formerly non-tradable shares and expectations of bad third-quarter economic data.'

Speculation about Beijing bolstering measures and intervening in the troubled stock market had been rife for some time.

But the market continued to slip as investors were dismayed that none of these materialised. They had expected the launch of the first government stabilisation fund to rescue the market in the past months.

But sources said the fund would not be ready until the regulators worked out the details.

By Tuesday, the Shanghai index had fallen 10.97 per cent since the Beijing Olympic Games began on August 8.

Analysts said stocks were oversold and yesterday's strong rally partly resulted from heavy bargain hunting.

In Hong Kong, the Hang Seng Index rose 446.89 points or 2.18 per cent yesterday to 20,931.26, buoyed by news of the economic stimulus plan.

The ripple effect also spread to other markets in Asia. The MSCI Asia Pacific Index rose 0.4 per cent, against a 1.14 per cent drop in the Dow Jones Industrial Average on Tuesday.

On the mainland, the key index sharply rebounded after it hit an intraday low of 2,306.662 points, close to the 2,300-point threshold.

Analysts predicted the benchmark would at least fall below 2,200 points in the coming weeks before the announcement of third-quarter economic data.

The China Securities Regulatory Commission tried to talk up the market again on Friday, pledging to launch more long-term funds including pension and corporate annuities to shore up confidence.

'If the regulator does want to launch the stabilisation fund, why didn't it mention a single word about it?' said Shenyin Wanguo Securities analyst Qian Qimin, adding investors should still be cautious because sentiment remained weak.