Mainland shares kept pace with the decline on concern that Beijing will continue to tighten the screws on lending after increasing the amount that banks are required to hold as reserves at the weekend.

The jitters steadied in European and and US trading, with London's FTSE 100 ending the day up 0.5 per cent at 6,337.9, and the Dow Industrial Average up 0.61 per cent at 13,122.08 in midday trading.

The HSI has risen 30 per cent since August, when the 'through-train' plan, allowing individual mainland investors to buy Hong Kong stocks, was mooted.

Credit Suisse chief economist Dong Tao said in a report the bank had confirmed the 'through-train' to Hong Kong would be delayed until the second quarter of next year at the earliest. The report did not identify a source of the confirmation.

Beijing is now back-pedalling on the scheme because of concerns it will lead to a slump in mainland markets and expose uneducated investors to unnecessary risks.

The HSI is more than 12 per cent down from its record high of 31,638.22, reached on October 30, as concerns deepen about deteriorating international credit markets and as initial euphoria about the 'through-train' dissipates.

'A portion of the anticipated liquidity into Hong Kong's market may not materialise as soon as many had hoped,' said Jing Ulrich, chairman of China equities at JP Morgan. 'With sentiment drifting lower in the near term, investors are more inclined to take profit.'

HSBC was among the hardest hit in the sell-off, falling 2.77 per cent to HK$137.10. Britain's Daily Telegraph said the bank would report US$1 billion in bad debts from its US mortgage business when it announces third-quarter results this week.

Morgan Stanley advised investors to reduce their holdings in the stock on expected subprime losses, while Goldman Sachs cut its earnings forecast for HSBC for this year and next.

Goldman said provisions for HSBC Finance would hit US$8 billion in 2007 and US$9.4 billion in 2008. '[We] now project a 14 per cent earnings decline for the firm in the second half of 2007,' Goldman Sachs analyst Roy Ramos said in a research note.

The Shanghai Composite Index fell 2.4 per cent to close at 5,187.73 yesterday, after posting its largest weekly drop in nine years last week.

The People's Bank of China on Saturday said commercial banks would have to raise their reserve ratios for the ninth time this year, in an effort to cool the overheating economy.

Elsewhere in the region, Japan's Topix Index hit a two-year low, and the Korean and Taiwanese markets slumped more than 3 per cent.

JP Morgan's Mr Ulrich said the market slump was occurring 'against a backdrop of persisting anxiety over fallout from the US subprime crisis'. And the worst may not be over, Fulbright Securities general manager Francis Lun Sheung-nim said. 'The [HSI] may fall to as low as 27,400.' But he noted 'company results are generally good and supporting the market. There is still plenty of liquidity'.