“The negative impact now has exceeded the positive side,” Deng said. “In order to protect the stability of the stock market, the CSRC has decided to suspend the mechanism.”

The CSRC will learn from the experience, and study ways for improvement, Deng added.

The announcement follows a dramatic trading day that saw Hong Kong stocks dragged down, as were other major markets in Asia and Europe, amid fears over the volatility in China’s equity markets and a rapid decline in the Chinese yuan.

China’s benchmark Shanghai Composite Index ended down 7 per cent at 3,125.00. The index has fallen 12 per cent in just four trading day this year, more than wiping out its gains for 2015, when it rose 9.3 per cent for the year.

Meantime, the large-company tracking CSI300 finished 6.9 per cent lower at 3,294.38.

During Thursday’s session the Shanghai and Shenzhen stock markets were suspended from trading for first time at 9:42 am, when the CSI300 index dropped more than 5 per cent. It took another minute for the market to fall by a total of 7 per cent when trading resumed at 9:57 am. That triggered the second stage of the circuit breaker, shuttering the market for the day.

Looking ahead, some analysts said Hong Kong markets will continue to be negatively affected by volatility on Chinese equity markets.

“Hong Kong is like an ATM, and when you cannot sell on the mainland, you cash out freely here,” said Louis Tse Ming-kwong, director of VC Brokerage.

He added that a lot of short positions had been built in Hong Kong in the previous months, based on a bearish outlook for the mainland economy and a weakening currency, and now “they are making a killing”.

The Hang Seng Index tumbled 3.1 per cent to close at 20,333.34, its lowest closing level since July 2013. The drop also marked its steepest daily percentage decline since late August. The Hang Seng China Enterprises Index, which tracks Hong Kong-listed mainland Chinese companies, sank 4.2 per cent to 8,753.97.

“Investors are spooked by the functioning of the new circuit breaker mechanism and the downward pressure on the renminbi,” said Tom Rafferty, Asia economist for The Economist Intelligence Unit in Beijing.

Analysts had blamed the circuit-breaker mechanism, introduced by Chinese authorities ahead of the start to the trading week, as unnerving investors, rather than tamping down volatility as intended.

“The new circuit breakers were supposed to act as stabilisers in the stock market, by allowing a cooling period for frantic traders,” said Bernard Aw, an analyst for IG Group.“However, they seemed to produce the opposite effect, as market participants rush to exit positions before getting locked out by the trading halts, which exacerbated the decline.”

The market stability mechanism was designed to kick in for 15 minutes if the CSI300 Index moved 5 per cent, effectively freezing trade for all stocks, options and index futures. If the CSI300 move widened to 7 per cent, all markets will shut down for the rest of the day.

Aw noted that the thresholds for China’s circuit breakers might be “too tight” given the recent volatility in the country’s stock markets, compared with similar schemes in many countries, such as the US and Thailand.

“As a corollary, the Chinese authorities may need to widen the thresholds,” he added.

As of Thursday several mutual funds had filed petitions with the Chinese securities regulator, asking that policymakers revise the circuit-breaker scheme. One concern was that the circuit breaker, when invoked, would spark a wave of redemption requests from investors, according to a Thursday news report by qq.com, Tencent’s news portal site.

HSBC analyst Steven Sun said regulators need to take a second look at the way the circuit-breaker system is structured.

“We expect the circuit breaker to be refined in the coming months to help protect rather than squeeze out market liquidity,” Sun said ahead of the CSRC’s announcement to revoke the mechanism.

“Hopefully, this will include a higher threshold to trigger market suspension or complete halt, or a shorter time period for a market halt or a combination of both.”

Sun said last year mainland shares fell over 5 per cent in intraday trade on 33 occasions It dropped over 7 per cent intraday on 11 occasions.

In the currency markets, the People’s Bank of China surprised traders on Thursday by setting the yuan’s mid-point at 6.5646 versus the US dollar, the lowest level since 2011, fuelling concerns that the central bank may guide its currency weaker to help boost its struggling exports.

The mid-point rate was down 0.51 per cent from Wednesday’s reference rate, marking its biggest daily fall since August, when an unexpected yuan devaluation sparked fears for a currency war and jolted global markets.

The offshore yuan touched a record low of 6.7511 against the US dollar, the weakest level it has seen since the market for the currency was launched in 2010, before bouncing back to 6.6889 in the afternoon. The onshore yuan was also weaker by 0.55 per cent at 6.5921, its lowest level since December 2010.

On Thursday, official statistics showed China’s foreign reserve exchange in December dropped by US$107.9 billion to US$3.33 trillion, the biggest monthly decline on record.

Other Asian markets also settled sharply lower Thursday Tokyo’s Nikkei Average gave up 2.3 per cent, Sydney’s S&P/ASX200 shed 2.2 per cent, and Seoul’s Kospi Composite Index ended down 1.1 per cent.

European markets pulled back heavily in early trading, with the Stoxx Europe 600 index dropping 3.2 per cent, poised for its biggest one-day loss since September. Wall Street was also on track to open significantly lower, as the futures for the Dow Jones Industrial Average indicated a 2 per cent drop.

On the energy markets, West Texas Intermediate futures were down 5 per cent to US$32.10 a barrel, the lowest since 2003, while Brent futures also fell about 5 per cent to US$32.16 a barrel, its lowest since 2004.