China's Main Stock Index Falls 7.2 Pct

SHANGHAI, China - Chinese stocks plunged Tuesday, with the benchmark Shanghai Composite Index falling 7.2 percent to its lowest close since early August amid the second straight day of global declines.

The drop, and the losses in many major markets, reflected growing fears of a sell-off on Wall Street once markets reopen in the U.S. following a public holiday on Monday, analysts said.

The Shanghai Composite index lost 354.69 points to 4,559.75, its lowest close since Aug. 2, when it ended at 4,407.73. The Shenzhen Composite Index of China's second, smaller exchange fell 7.7 percent to 1,337.24.

Trading was volatile, with the Shanghai index falling sharply in the morning, recovering some lost ground by midday, and then plunging again by more than 8 percent in the afternoon.

"Panicky investors are selling now because they're afraid China's stock markets will tumble further tomorrow following the U.S.'s expected overnight losses," said Zhang Yidong, an analyst at Industrial Securities.

Across the region, Japan's benchmark Nikkei index plunged 5.7 percent to its lowest close in more than two years, while Hong Kong's Hang Seng Index was down 8.8 percent by late afternoon.

Share prices fell sharply Monday in Asia and Europe following Wall Street's declines last week amid pessimism over a U.S. government plan to prevent a recession.

China's yuan-denominated "A shares" are generally off-limits to foreign investors, and other restrictions have tended to isolate the mainland Chinese markets from global trends.

But the recent uncertainty over the global economic outlook and reports that Chinese banks may be facing significant losses from their exposure to the U.S. mortgage crisis have rattled local investors.

"The sharp decline actually shows China's rising position in world financial markets," said Peng Yunliang, a senior analyst at Shanghai Securities.

"China cannot be isolated from international markets since its economy is now closely linked to the rest of the world," he said.

The Shanghai benchmark has fallen 13 percent since the beginning of the year, after nearly doubling in 2007.

Banks and other financial companies led declines. Industrial & Commercial Bank fell by 8.5 percent to 6.92 yuan; Ping An Insurance fell by the 10 percent daily limit to 79.55 yuan and market heavyweight PetroChina slipped 4.7 percent to 26.18.

Flag carrier Air China fell by the 10 percent daily limit to 24.73 yuan amid signs that smaller rival China Eastern Airlines is rebuffing a tie-up with Air China's parent company. China Eastern also fell by the 10 percent limit Tuesday, to 17.47 yuan.

In currency dealings, the dollar was at 7.2362 yuan around 0730 GMT on the over-the-counter market, down slightly from Monday's close of 7.2365.