Fears of a full-blown recession panicked investors yesterday, sending the stock market plunging more than five per cent. In its worst day since early February, the Hang Seng Index fell 498.78 points to 8,983.43. The drop spurred lesser falls across the region and contributed to corrections in overseas markets. Wall Street was trading nearly 200 points down by mid-afternoon before rallying to 8845.90, down 116.84 points, or 1.3 per cent, by 3.45 pm. In London, the index closed down 1.7 per cent. The plunge in the Hang Seng Index followed the revelation on Tuesday that the economy had shrunk in the first quarter for the first time in 13 years. Brokers said the comments from Chief Executive Tung Chee-hwa about the state of the economy had combined with falls on Wall Street and a worsening property price war had sparked yesterday's free fall. ING Futures & Options sales trader Kathleen Emerson said: 'It seems that Hong Kong is being dragged into the regional whirlpool.' Since late March, the market has lost almost a quarter of its value. Strategists have warned in the past few days that they see few reasons for a recovery in share prices. Hongkong Bank chief economist Jan Lee said the market's recovery in the aftermath of its October crash now seemed ill-placed. 'There was a false dawn and we are seeing the reaction to that,' he said. Analysts say the economy could grow by just one per cent this year, as demand from regional export markets wanes and consumers cut spending over increasing fears of falling incomes. Mr Tung said on Tuesday a 'major economic adjustment' was under way, 'the result of which may be prolonged and painful to everyone'. Andy Xie, Morgan Stanley Asia senior economist for Greater China, said a tax cut was needed to reinvigorate the economy. 'The Government is well positioned with its huge reserves to cut taxes and it is the right policy response,' he said. However, Mr Lee said there were dangers in using fiscal stimulus to spur an export-reliant economy. 'If you start to prime the fiscal pump, you are likely to accelerate imports,' he said. DBS Securities director Percy Au-young said confirmation of negative growth in the first quarter had spooked the market. 'It means we are not sure when Hong Kong will recover from recession,' he said. There have been persistent rumours that global investors such as US billionaire George Soros have taken huge punts in the past few weeks that the market is set for further falls. No sector escaped yesterday's fall with HSBC Holdings dropping 4.7 per cent to $188.50, its lowest since mid-February. Property stocks were hit by news the Sino Group had slashed 23 per cent off the asking prices on remaining units at its Villa Oceania development in Ma On Shan.