Just days ago regional stock markets free of a domestic Sars outbreak were seen as a play on a global economic recovery. Now, 'Sars has taken the wind out of everyone's sails for Asia', said Kes Visuvalingam, a director of Asian equities at First State Investments.

The Hang Seng Index fell a relatively moderate 0.39 per cent to a fresh 4.5-year low yesterday, with analysts saying investors had become comparatively inured to the crisis.

However, one-year forward contracts on the Hong Kong dollar hit a new five-month high, reaching 355 pips over the spot price, up 32.5 pips, on worries about the government's ability to rein in its huge Budget deficit.

In Japan, the Nikkei-225 Index slid 1.97 per cent to a fresh 20-year low after Sony Corp shocked the market with an earnings announcement that fell way short of expectations. The electronics giant plunged its limit 13.5 per cent with many frustrated sellers still looking to unload their holdings.

South Korea has yet to record its first Sars case, yet the panic has spread to its market. China's rapid growth in recent years has turned it into Korea's biggest export market. China was now in danger of a rapid slowdown as the Sars crisis unfolded, which had profound economic consequences for Korea, Mr Visuvalingam said.

There were less fundamental reasons why investors were also worried that Korea's retail consumption could be hit, given it has avoided an outbreak of the disease. Department store Shinsegae plunged 7.31 per cent yesterday while home shopping companies bucked the market trend and rose, Mr Visuvalingam said.

Also unnerving Korean investors was North Korea's claim during talks with the United States in Beijing that it had already produced nuclear weapons.

Taiwanese investors were unnerved after the authorities ordered a Taipei hospital and more than 1,100 people inside to be quarantined after 30 suspected Sars cases were found.

CSFB head of regional strategy Stewart Paterson said the sell-off might also have been driven by concern that many Taiwanese companies had production centres on the mainland, which could be disrupted by Sars.

'If China gets the same proportion of Sars cases as Hong Kong, then the mainland could be looking at 300,000 cases,' Mr Paterson said.

For the week, South Korea took the worst punishment, losing 9.3 per cent. Taiwan slid 9.11 per cent and China's four main stock gauges lost between 6.58 per cent and 8.03 per cent. Hong Kong got off relatively lightly with a fall of 1.98 per cent for the Hang Seng Index.

Mr Paterson said China's huge increase in the number of reported cases as it came clean on the extent of its Sars problem was at the centre of the widening turmoil on the region's markets this week.

'People are probably putting two and two together, and saying China is behind the curve in tackling Sars and they therefore have to get ahead of the curve. That's probably going to have economic ramifications,' he said.

Graphic: bad26gbz