HONG KONG stocks plunged yesterday as panicked investors fled the market ahead of an expected increase in interest rates and a deteriorating property market. The Hang Seng Index fell 3.1 per cent to close 286.42 points down at 8,934.59. At one stage the market was down 360 points as traders stood back and watched the frenzy of overseas selling. Yesterday's slump compounded the local market's reputation as one of the worst performing in the world in 1994. In the year to date the market, in Hang Seng Index terms, is down 26 per cent and it is down 26.8 per cent off its last record close of 12,201 on January 4. The Robert Fleming Index was up four points to 8,938 in early trading overnight, but brokers are bracing themselves for a further sell-off when the market re-opens today. Brokers blamed the deteriorating residential property market and fears of a rise in interest rates today for the fall. Hardest hit in the massive sell-off were the large property developers. Cheung Kong fell $1.75 to $35.75, Sun Hung Kai Properties lost $2.75 to $47, and New World Development dropped $1.70 to $23.40. Bank shares were also hit on fears that an interest rate increase would further erode lending margins. HSBC fell $3 to $85 and Hang Seng Bank dropped $1 to $50. Panic selling in the morning stripped 360 points from the index in the first few minutes of trading as investors sold their stocks. ''People have seen the property bubble burst and they want out,'' said one broker. Barclays de Zoete Wedd assistant director Nial Gooding said his clients were equally as grim. ''Foreign investors are saying 'get me out of property, I don't want it','' he said. Any hope of a recovery in property counters was dashed after the Sino-British Land Commission released 56.81 hectares of land for private and assisted housing. The move effectively increases the amount of land available for residential use by 23 per cent compared with last year's grant. Brokers said it was clear the Government was serious about bringing prices down and that developers would suffer as a result. The sudden turn-about in residential property prices has even caught the experts off guard. And while the news is good for those wanting to buy a home, the implications for property developers are serious. Baring Securities director James Osborn said everyone was waiting on the Government's next move. ''The jury is still out on whether the market will fall by the 5-15 per cent the Government hopes for or whether prices will plunge even further,'' he said. ''They could fall by 30 or 40 per cent - that's the scary thing,'' he added. Nobody expected flat prices to fall as quickly or as dramatically as they did. The sudden turn-about in flat prices over the week has sparked a dramatic sell-off in property related stocks. Yesterday's sell-off was even more worrying because the main sellers were European institutions, typically strong supporters of the local market. There had been signs that foreigners were taking an interest in Hong Kong stocks again after having been heavy sellers in February. The sudden downturn in the property market and the likelihood of higher interest rates has now scared many away. Bank stocks also came under heavy pressure ahead of today's Hong Kong Association of Banks meeting where interest rates will be discussed. Monday's increase in United States interest rates - the third this year - will put pressure on Hong Kong banks to increase their rates. This is because the Hong Kong dollar is pegged to the US dollar and any difference in interest rates will put pressure on the peg. In a Business Post survey of leading brokers and fund managers yesterday, 70 per cent said they expected the banks to raise rates today.