The two-day slide wiped 5.54 per cent or 872.46 points off the index, dragging it down to a two-week low and below the 15,000-point level for the first time in seven trading days.

China Construction Bank Corp and Bank of China paced losses among the lenders, tumbling 5.87 and 4.08 per cent, respectively.

'In afternoon trade, A shares had a big drop so it gave the Hong Kong market selling pressure,' said Linus Yip, a strategist at First Shanghai Securities. 'The fundamentals are not turning good, so the market just tried to find some excuses to have a correction.'

Investors were spooked by speculation that mainland authorities may try to curtail some of the excess capital in the market that has helped drive a recent equity rally. Concern rose after the People's Bank of China said it sucked up 165 billion yuan (HK$187.23 billion) in repurchase loans on Tuesday.

Markets seemed poised for profit taking yesterday after managing only marginal opening gains following Tuesday's rally on Wall Street and United States Secretary of the Treasury Timothy Geithner's comments that most US banks were currently well capitalised.

US stocks were trading mixed yesterday, with the Dow Jones Industrial Average down 23.81 points or 0.3 per cent at midday. The S&P 500 Index rose 1.12 points or 0.13 per cent.

European markets rebounded from early losses, with London closing 43.2 points or 1.08 per cent higher.

Markets in the region finished mostly flat. South Korea rose 1.44 per cent, while Japan edged up 0.18 per cent and Taiwan added 0.08 per cent.

The sharp drop in Shanghai marked the first time the market index had dipped below the symbolic 2,500-point level in almost two weeks. Concerns about slowing loan growth were compounded by rising fears of an impending flood of initial public offerings into the market.

'The speculation on initial share offers and lendings may prove wrong, but the drop was a sign that many investors started to panic,' said Sun Chao, an analyst at Citic Securities. 'Those who had made paper profits in the past weeks were eager to cash out.'

The China Securities Regulatory Commission on April 3 rejected a listing application by Ningbo QL Electronics, six months after suspending new share approvals. But analysts said new listings might be inevitable, given the market gains this year.

Loan growth might slow after expanding at a torrid pace in the first quarter of this year, said Bonnie Lai, an analyst with China Construction Bank (International).

Ms Lai said loan growth was expected to moderate this month and banks would focus on optimising their loan mix in the second quarter as they tightened approvals and became more mindful of credit quality.

The market rally over the past six weeks could lose even more steam if the global economy shows further signs of deterioration.

'It has already exceeded the typical bear market bounce,' said Geoff Lewis, the head of investment services at JP Morgan Asset Management. 'But disappointment lies ahead and this is not the real thing.'

Mr Yip said the Hang Seng Index might find initial support at the 14,200-point level in the near term.

Additional reporting by Maria Chan and Natalie Chiu